UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number: 001-39005
Sundial Growers Inc.
(Exact name of Registrant as specified in its charter)
#200,#300, 919 - 11 Avenue SW
Calgary, AB, Canada, T2R 1P3
Tel.: (403) 948-5227
James Keough, Chief Financial Officer
#300, 919 – 11 Avenue SW
Calgary, AB, Canada, T2R 1P3
Tel.: (403) 948-5227
investors@sundialgrowers.com
(Name, Telephone, E-mail and/or facsimile number and Address of Company Contact Person)
Securities registered or to be registered, pursuant to Section 12(b) of the Act
Common Shares |
| SNDL |
| Nasdaq |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. As at December 31, 2019, 107,180,4232021, 2,060,408,357 common shares were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer ☐ | Non-accelerated filer | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ |
| International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ |
| Other ☐ |
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
TABLE OF CONTENTS
|
|
| Page |
|
|
|
|
| 5 | ||
| 5 | ||
|
|
|
|
PART I |
|
|
|
|
|
|
|
ITEM 1. |
| 7 | |
|
|
|
|
ITEM 2. |
| 7 | |
|
|
|
|
ITEM 3. |
| 7 | |
|
|
| 7 |
|
|
| 7 |
|
| ||
| 7 | ||
|
|
|
|
ITEM 4. |
| 38 | |
|
| 38 | |
|
| 40 | |
|
|
| |
|
|
| |
|
|
|
|
ITEM 4A. |
| 51 | |
|
|
|
|
ITEM 5. |
| 51 | |
|
| 51 | |
|
| 51 | |
| C. Research and development, patents and |
| 52 |
|
| 52 | |
|
| 52 | |
|
| 52 | |
|
|
|
|
ITEM 6. |
|
| |
|
|
| |
|
| 54 | |
|
|
| |
|
|
| |
| 65 | ||
ITEM 7. | 65 | ||
65 | |||
66 | |||
| 68 | ||
|
|
|
|
ITEM |
|
| 68 |
| A. |
| 68 |
|
|
| |
| |||
|
| ||
| |||
| |||
|
|
|
|
ITEM 9. |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
2
|
| ||
|
|
|
3
71 | |||
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
| |||
|
|
|
|
ITEM 11. |
|
| |
|
|
|
|
ITEM 12. |
|
| |
| |||
|
|
|
|
PART II |
|
|
|
|
|
|
|
ITEM 13. |
|
| |
|
|
|
|
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 80 | |
A-D. Material Modifications to the Rights of Security Holders |
|
| |
80 | |||
|
|
|
|
ITEM 15. |
|
| |
|
|
|
|
ITEM 16 |
|
|
|
|
|
| |
|
|
| |
|
|
| |
| D. Exemptions from the Listing Standards for Audit Committees |
|
|
| E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
PART III |
|
|
|
|
|
|
|
ITEM 17. |
|
| |
|
|
|
|
ITEM 18. |
|
| |
|
|
|
|
ITEM 19. |
|
|
3
Unless otherwise indicated, all references in this annual report on Form 20-F (the “Annual Report”) to “Sundial,” “we,” “our,” “us,” “the Company” or similar terms refer to Sundial Growers Inc. and its consolidated subsidiaries. We publish our consolidated financial statements in Canadian dollars. In this Annual Report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CDN$,” “CAD$,” and “dollars” mean Canadian dollars and all references to “US$” or “USD”, mean United States dollars.
Unless otherwise indicated, all references in this Annual Report to “Bridge Farm” refer to Bridge Farm Nurseries Limited, its subsidiaries and, subsequent to August 11, 2017, Project Seed Topco Limited, the parent of Bridge Farm Nurseries Limited. We completed the acquisition of Bridge Farm on July 2, 2019.
This Annual Report contains our audited consolidated financial statements and related notes for the year ended December 31, 2019,2021, the ten monthsyear ended December 31, 20182020, and the year ended February 28, 2018.December 31, 2019 (“Annual Financial Statements”). Our Annual Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
In addition to our financial results presented in accordance with IFRS as issued by the IASB, we believe certain non-IFRS measures provide useful information both to management and investors in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by IFRS (or US GAAP)U.S. generally accepted accounting principles (“U.S. GAAP”)); and, therefore, they may not be comparable to similarly titled measures presented by other companies, and they should not be construed as an alternative to other financial measures determined in accordance with IFRS.
All references to “shares” or “common shares” in this Annual Report refer to the common shares of Sundial Growers Inc., no par value.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “anticipate”, “assume”, “believe”, “contemplate”, “continue”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “may”, “objective”, “plan”, “predict”, “potential”, “positioned”, “pioneer”, “seek”, “should”, “target”, “will”, “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.
These forward-looking statements include, but are not limited to, statements about:
• | the uncertainties associated with the COVID-19 pandemic, including our ability to continue operations, the ability of our suppliers and distribution channels to continue to operate, and the use of our products by consumers, and disruptions to the global and local economies due to related stay-at-home orders, quarantine policies and restrictions on travel, trade and business operations and a reduction in discretionary consumer spending; |
• |
|
• | our ability to successfully implement our cost and asset optimization initiatives; |
•our ability to successfully implement our cost and asset optimization initiatives;
•the continued development and growth of the demand and markets for medical and adult-use cannabis and CBD products;
•the maintenance of our existing licences and the ability to obtain additional licences as required;
•our ability to establish and market our brands within our targeted markets and compete successfully;
•our ability to produce and market additional products as regulations permit;
•the number of flowering rooms and combined production capacity therefrom that we expect to have by the end of 2020;
•our growth strategies, including plans to sell edibles and other forms of cannabis as well as CBD products;
•the timing and the amount of capital expenditures related to the proposed expansion or conversion of our facilities;
•the transition of Bridge Farm’s historical ornamental flower business to the cultivation of hemp and extraction of CBD;
•the outcome of medical research by our partners and the acceptance of such findings in the medical community;
•our ability to leverage Bridge Farm’s existing distribution relationships for future CBD products;
•our ability to attract and retain key employees;
4
•our ability to manage growth in our business;
•our ability to execute a sale of Bridge Farm; and
•our ability to identify and successfully execute strategic partnerships.
• | the continued development and growth of the demand and markets for medical and adult-use cannabis; |
• | the competitive conditions of the industry and the expected number of customers using our products; |
• | the maintenance of our existing licences and the ability to obtain additional licences as required; |
• | our ability to establish and market our cannabis and retail brands within our targeted markets and compete successfully; |
• | our ability to produce and market additional products as regulations permit; |
• | our growth strategies; |
• | the timing and the amount of capital expenditures related to maintenance of our facilities; |
• | our ability to attract and retain key employees and franchisees; |
• | our ability to generate and manage growth in our business, including expanding our cultivation operations and retail network; |
• | our ability to identify and successfully execute and manage strategic partnerships, joint ventures (including SunStream (as defined below)), strategic alliances, debt and equity investments as well as the costs and benefits associated with such initiatives, including the expected return on any investments; |
• | our ability to find suitable acquisition opportunities, as well as finance and integrate any acquisitions; and |
• | the volatility in the price of our common shares. |
Although we base the forward-looking statements contained in this Annual Report on assumptions that we believe are reasonable, we caution you that actual results and developments (including our results of operations, financial condition and liquidity, and the development of the industry in which we operate) may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report. In addition, even if results and developments are consistent with the forward-looking statements contained in this Annual Report, those results and developments may not be indicative of results or developments in subsequent periods. Certain assumptions made in preparing the forward-looking statements contained in this Annual Report include:
•our ability to obtain and maintain financing on acceptable terms to allow us to maintain operations;
•our ability to implement our operational and liquidity strategies;
• | our ability to implement our operational and liquidity strategies as well as our strategic initiatives; |
our ability to optimize our costs by implementing cost-cutting initiatives, deferring capital expenditures and conducting a strategic review of certain facilities;
• | our competitive advantages; |
• | the impact of competition; |
•our competitive advantages;
•the development of new products and product formats for our products that align market demand;
•the impact of competition;
•the changes and trends in the cannabis industry;
•changes in laws, rules and regulations;
•our ability to maintain and renew required licences;
•our ability to maintain good business relationships with our customers, distributors and other strategic partners;
•our ability to keep pace with changing consumer preferences;
•our ability to protect our intellectual property;
•our ability to manage and integrate acquisitions, particularly Bridge Farm;
•our ability to retain key personnel; and
•the absence of material adverse changes in our industry or the global economy, including as a result of COVID-19.
• | the changes and trends in the cannabis cultivation and retail industry; |
• | changes in laws, rules and regulations; |
• | our ability to maintain and renew required licences; |
• | our ability to maintain good business relationships with our customers, distributors and other strategic partners; |
• | our ability to keep pace with changing consumer preferences; |
• | our ability to protect our intellectual property; |
• | our ability to manage and integrate acquisitions; |
• | our ability to retain key personnel; |
• | our ability to efficiently deploy capital and achieve our expected and desired returns on such investments; |
• | our ability to open new retail locations and attract a sufficient number of qualified franchisees; and |
• | the absence of material adverse changes in our industry or the global economy, including as a result of COVID-19. |
These forward-looking statements are based on our current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Item 3D—Risk Factors”, and elsewhere in this Annual Report. Readers of this Annual Report are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Annual Report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission (the “SEC”) after the date of this Annual Report.
This Annual Report contains estimates, projections and other information concerning our industry, our business, and the markets for our products. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.
In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section of this Annual Report titled “Item 3D—Risk Factors”. These and other factors could cause our future performance to differ materially from our assumptions and estimates.
PART I
5
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
|
| Year ended Dec 31 |
|
| Ten months ended Dec 31 |
|
| Year ended Feb 28 | Year ended Feb 28 | ||||||||||||||
($000s, except as indicated) |
| 2019 |
|
| 2018 |
|
| 2018 | 2017 | ||||||||||||||
Gross revenue |
|
| 79,225 |
|
|
| — |
|
|
| — | — | |||||||||||
Net revenue |
|
| 75,860 |
|
|
| — |
|
|
| — | — | |||||||||||
Net loss |
|
| (271,629) |
|
|
| (56,526) |
|
|
| (12,995) | (1,545) | |||||||||||
Per share, basic and diluted |
|
| $(3.17) |
|
|
| $(0.82) |
|
|
| $(0.23) | $(0.04) | |||||||||||
Total assets |
|
| 510,036 |
|
|
| 110,200 |
|
|
| 25,754 | 12,666 | |||||||||||
Net assets (liabilities) |
|
| 221,198 |
|
|
| (7,908) |
|
|
| 13,710 | 11,521 | |||||||||||
Total non-current liabilities |
|
| 19,592 |
|
|
| 48,450 |
|
|
| 116 | 17 | |||||||||||
Share capital |
|
| 509,654 |
|
|
| 65,133 |
|
|
| 25,769 | 15,136 | |||||||||||
Shareholder’s equity |
|
| 216,484 |
|
|
| (7,908) |
|
|
| 13,710 | 11,521 |
Not applicable.
Not applicable.
D. | Risk factors. |
Risk Factors Summary
Investing in our common shares involves a high degree of risk. You should carefully consider the risks described in this item before making a decision to invest in our common shares. If any of these risks actually occur, our business, financial condition and financial performance would likely be materially adversely affected. In such case, the trading price of our common shares would likely decline, and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:
| We have a history of net losses, and we may not achieve or maintain profitability in the future. |
• | The industry in which we operate and the regulations governing it continue to develop, and if they develop or change in ways that differ from our expectations or ways that are adverse to us, our business and results of operations may be adversely impacted. |
• | We are dependent upon regulatory approvals and licences for our ability to grow, process, package, store and sell cannabis and other products derived therefrom as well as to own and operate cannabis retail stores through which we and our franchisees sell cannabis products, and these regulatory approvals are subject to ongoing compliance requirements, reporting obligations and fixed terms requiring renewal. |
• | Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure. |
• | We are, and may become, subject to litigation, regulatory or agency proceedings, investigations and audits. |
• | We face competition from the illegal cannabis market. |
• | We currently sell, and expect to continue to sell, a significant share of our product to provincial governments through supply contracts that may not generate orders as expected or which may not be renewed. |
• | We experience significant customer concentration, with a limited number of customers accounting for a significant portion of our revenues. |
• | We face risks associated with our franchise business model. |
• | Our success in the cannabis retail market is dependent, in part, on our ability to attract and retain an adequate retail consumer base. |
• | We are dependent upon a limited number of facilities that are integral to our cannabis cultivation and production business. |
• | We currently rely on a limited number of suppliers for our extraction requirements. |
• | We are subject to risks inherent in an agricultural business, including the risk of crop failure. |
• | Natural disasters, unusual weather, pandemic outbreaks such as COVID-19, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results. |
Going Concern Risk7
• | Significant interruptions in our access to certain key inputs such as labor, raw materials, electricity, water and other utilities may impair our growing operations and materially affect our business. |
• | Failure in our quality control systems may adversely impact our sales volume, market share and profitability. |
• | We intend to continue to focus primarily on the premium segment of the adult-use cannabis market, which may not be sustainable, or in which we may not be able to develop or maintain a brand that attracts or retains customers. |
• | The adult-use cannabis market in Canada has experienced, and may in the future experience, supply and demand fluctuations. |
• | We may be unsuccessful in competing in the overall legal adult-use cannabis market in Canada. |
• | We may make investments into equity or debt securities of other companies, or provide credit to other companies, and we may not obtain the anticipated level of return on such investments, or any return at all. |
• | Our joint venture interest in SunStream is subject to certain risks associated with the conduct of joint ventures. |
• | We may not realize all or any of the anticipated returns on our joint venture interest in SunStream, or any return at all. |
• | Cannabis remains illegal under U.S. federal law. Strict enforcement of federal laws regarding cannabis would likely result in SunStream’s inability to execute its business plan, and may subject us to significant civil or criminal liability and other adverse consequences. |
• | We are subject to the risk of possibly becoming an investment company under the Investment Company Act of 1940. |
• | A decline in the consumption of alcoholic beverage products could adversely affect our business, financial condition and results of operations. |
• | Unfavourable publicity or poor consumer perception of the Company’s liquor retail brands could have an adverse effect on the Company’s business, financial condition and results of operations. |
• | If a significant number of the Company’s licences were revoked or not renewed, or if the Company failed to secure new licences, there could be a material adverse effect on its business, financial condition, liquidity and results of operations. |
• | We may not be able to successfully identify and execute future acquisitions or dispositions or to successfully manage the impacts of such transactions on our operations. |
• | We face integration risks in connection with our acquisition strategy. |
• | The price of our common shares in public markets has experienced and may in the future experience extreme volatility and you may lose some or all of your investment in our common shares as a result. |
• | We may sell a substantial number of our common shares in the public market at any time. Such sales or the perception that they may occur could cause the market price of our common shares to drop significantly, even if our business is doing well. |
• | If we fail to meet applicable listing requirements, Nasdaq may delist our common shares from trading, in which case the liquidity and market price of our common shares could decline. |
Risks Related to Our Financial Position and Accounting
We have a history of net losses, and we may not achieve or maintain profitability in the future.
We were incorporated in 2006, began cultivating cannabis in 2012, and started selling cannabis in 2018 after the federal legalization of adult-use cannabis in Canada. In 2021, we expanded into corporate-owned and franchised cannabis retail with the acquisition of Inner Spirit, as well as created a new investments segment focused on our activities in the deployment of capital to strategic initiatives. We have yet to generate an annual profit. We generated a net loss from continuing operations before income tax of $232.5 million and $206.3 million, for the fiscal years ended December 31, 2021 and 2020, respectively, and had negative operating cash flows for each of these periods. Our accumulated deficit as of December 31, 2021 was $788.5 million. Although we have implemented business optimization initiatives and suspended construction of certain facilities, we will continue to expend significant funds to maintain our growing and production capacity, fund capital investments, expand our marketing and sales operations, expand our retail network and fund strategic investments. We may not achieve or maintain profitability.
Our consolidated financial statements containefforts to grow our business may be more costly than we expect and we may not generate enough revenue to offset our operating expenses. We have incurred, and may in the future incur, significant losses for a going concern qualification, which indicatesnumber of reasons, including as a result of unforeseen expenses, difficulties, complications and delays in obtaining governmental licences, failure to secure and profitably operate corporate-owned retail stores, failure to expand our franchised store network, failure to realize expected benefits of strategic investments and the existenceother factors and risks described in this Annual Report. The amount of a material uncertainty that casts significant doubtany future losses will depend, in part, on our ability to generate revenue on the one hand and any increases in our expenses on the other hand. If we continue as a going concern. Our ability to continue as a going concern dependsincur losses in the future, the net losses and negative cash flows incurred to date, together with any such future losses, will have an adverse effect on a numberour shareholders’ equity and working capital. Because of factors, including Health Canada maintainingthe numerous risks and uncertainties associated with our licences, the continued support of our lenders, our abilitybusiness and industry, we are unable to accurately predict when, or if, we will be able to achieve profitable operationsprofitability. Even if we achieve profitability at some point in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market price of
8
our common shares may significantly decrease and our ability to raise additional financing to fund current and future operations. Any delay or failure to achieve the foregoing would have a significant negative impact oncapital, expand our business and weor continue our operations may be forcedimpaired. A decline in the value of our common shares may also cause you to reducelose all or discontinue operations or seek protectionpart of the bankruptcy laws.your investment.
Our consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes thatUnless and until we achieve profitability, we will be ablerequired to realizefinance our assetslosses with issuances of equity or debt. Recently, we financed our liquidity needs primarily with issuances of equity and dischargeequity-linked securities, but our liabilitiesability to do so in the normal coursefuture will depend on future market conditions, which are beyond our control and may be adversely affected by factors which include, but are not limited to, macroeconomic conditions, volatility, wars and other armed conflicts, geopolitical tensions, pandemics, and other factors.
We have in the past, and may in the future, record significant impairments or write-downs of business. our assets.
Our liquidity and ability to comply with covenantscannabis inventory in our Syndicated Credit Agreementcannabis operations and Term Debt Facility (as such terms are definedcannabis retail segments has a finite shelf life and is subject to obsolescence, expiration, spoilage, shrinkage, unacceptable quality, contamination or other declines in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attachedvalue prior to this Annual Report as Exhibit 15.1)wholesale or retail sale. We have been negatively impacted by our significant levels of indebtedness, the oversupply of cannabis in the Canadian adult-usepast, and may in the future, be required to record substantial write-downs or impairments related to loss of value in our cannabis inventory.
In addition, our facilities may be subject to obsolescence, damage, loss of fair market value or other declines in value. For example, in the year ended December 31, 2020, we recorded significant write-downs with respect to our facility in Olds, Alberta (the “Olds Facility”) as a result of the carrying value of our total net assets significantly exceeding our market capitalization, due to distribution bottlenecks andreductions in capacity usage in response to decreasing estimates for the size of the potential Canadian cannabis market. In the same year, we recorded an impairment in connection with our facility in Rocky View, Alberta (the “Rocky View Facility”). Pursuant to a non-binding purchase agreement to sell the facility for $5.0 million, the recoverable amount of the Rocky View facility was determined to be its fair value less costs of disposal, leading to recording of a write-down of the asset to its recoverable amount.
Lastly, we may also record impairments to goodwill related pricing pressure. Additionally, atto our acquisitions, intellectual property, investments or similar assets. In the year ended December 31, 2020, we recorded an impairment with respect to the intellectual property assets of Pathway Rx (“Pathway”) due to our decision to reduce our focus on medical cannabis research. In the year ended December 31, 2019, we were not in compliance with the interest coverage ratio in our Syndicated Credit Agreement, the full principal amount of our Syndicated Credit Agreement and Term Debt Facility was classified asrecorded a current liability on our balance sheet as of such date. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreementsubstantial goodwill impairment related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company.(of which we have since disposed).
6
In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020. In addition, we anticipateThere can be no assurance that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020required to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliancerecord inventory, facility, goodwill, intellectual property, investment or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar amendmentsother write-downs in the past; however, there is no guarantee that we willfuture. Such write-downs could be substantial and result in a material adverse effect on our business, financial condition and results of operations.
We have material weaknesses in our internal control over financial reporting and our management may not be able to do so in the future.successfully implement adequate internal control over financial reporting or disclosure controls and procedures.
Our present level of indebtedness, our significant accumulated losses, the existing legal cannabis distribution bottlenecks, production and expected demand disruptions caused by the COVID-19 pandemic present challenges to our ability to complyIn connection with the covenants in the agreements governingaudit of our indebtedness and management anticipates that our available cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy the our liquidity requirementsconsolidated financial statements for the next 12 months.fiscal period ended December 31, 2021, our management and independent auditors concluded that there were material weaknesses in our internal control over financial reporting as at December 31, 2021. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses identified were (i) an ineffective control environment resulting from an insufficient number of financial reporting and accounting, and information technology (IT) personnel with the appropriate knowledge, experience or training commensurate with the Company’s financial reporting requirements, (ii) the insufficient number of personnel described above contributed to an ineffective risk assessment process necessary to identify changes to its operations and to identify all relevant risks of material misstatement and to evaluate the implications of relevant risks on its internal control over financial reporting (iii) an ineffective information and communication process resulting from a combination of deficiencies within its information technology general and application controls (“ITGCs”) across the systems supporting the Company’s financial reporting process, including access controls and administrator-level access resulting in a lack of segregation of duties, resulting in insufficient controls to ensure the relevance, timeliness and quality of information used in control activities, and (iv) as a consequence of the above and as a result of inadequate segregation of duties and secondary review, the Company had ineffective control activities related to the design, implementation and operating effectiveness of process level and financial reporting controls which had a pervasive impact on the Company's internal control over financial reporting.
These material weaknesses resulted in material misstatements, which were corrected prior to the release of the consolidated financial statements as of and for the year ended December 31, 2021, and also in immaterial misstatements, some of which were corrected prior to the release of the consolidated financial statements as of and for the year ended December 31, 2021. These material weaknesses create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis.
Management has implemented and continues to implement measures designed to ensure that control deficiencies are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include:
• | developing and maintaining documentation underlying ITGCs to promote knowledge transfer upon personnel and function changes; |
• | developing enhanced procedures and controls related to administrator and privileged-level access to IT systems; |
• | implementing an IT management review, documentation and testing plan to enhance implementation and monitoring of software updates and changes with a specific focus on systems supporting our financial reporting processes; |
• | adding personnel with an appropriate level of knowledge, experience and training commensurate with the Company’s financial reporting requirements; and |
• | working with our advisors to develop a plan to improve our risk assessment process and to assist with process improvements and control remediation efforts. |
The Company is pursuing remediation of all of the above material weaknesses during the 2022 fiscal year.
If we fail to establish and maintain adequate internal controls, including by remediating the aforementioned material weaknesses, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. As a result, we require additional fundingmay be subject to meetcostly litigation and shareholder actions, our ongoing obligationsaccess to the capital markets may be limited or adversely affected, our results of operations may be adversely affected and the trading price of our common shares may decline. Additionally, ineffective internal controls could expose us to fund anticipated operating lossesan increased risk of fraud or misuse of corporate assets and no assurance cansubject us to potential delisting from the stock exchanges on which we list or to other regulatory investigations and civil or criminal sanctions. Furthermore, we may be given that future sourcesthe subject of capital willnegative publicity focusing on the restatement of our previously issued financial results and related matters and may be available.
In addition,adversely impacted by negative reactions from our shareholders, creditors, or others with whom we do business. This negative publicity may impact our ability to attract and retain customers, employees and suppliers.
Proper systems of internal control over financial reporting and disclosure controls and procedures are critical to the operation of a public company. However, we do not expect that our internal control over financial reporting or disclosure controls and procedures will prevent all errors and remove all risk of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The valuation of our biological assets is subject to certain assumptions and estimates.
Pursuant to IFRS, we measure the value of our biological assets (consisting of plants in various stages of vegetation) at fair value less costs to sell up to the point of harvest. As market prices are generally not available for biological assets while they are growing, we are required to make assumptions and estimates relating to, among other things, expected harvest yields, selling prices and costs to sell. The assumptions and estimates used to determine the fair value of biological assets, and any changes to such prior estimates, directly affect our reported results of operations. If actual yields, prices, costs, market conditions or other results differ from our estimates and assumptions, there could be material adjustments to our results of operations. In addition, the use of these future estimated metrics differs from US GAAP. As a result, our financial statements and reported earnings are not directly comparable to those of similar companies in the United States.
We may be subject to credit risk.
Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us. We have credit risk exposure based on the balance of our cash, accounts receivable, investments, and taxes recoverable. There are no assurances that our counterparties, including parties to whom we extended credit, or customers will meet their contractual obligations to us.
We have implemented, and continue asto implement, business optimization initiatives, which may negatively impact our control environment and distract from our operation of the business and may not be successful.
In response to slower than expected regulatory approvals of new retail stores and delays in some cannabis derivative products, in 2020 and 2021, we implemented several cost savings and business optimization initiatives, including the enhancement of facility workflows and processes, realignment of product lines and product formats to areas of stronger demand, workforce optimization and a going concern dependsheightened discipline in cost management. The Company continues to pursue additional business optimization initiatives, including optimization of power usage, streamlining the workforce and improving supply chain efficiency. As part of the leadership team's focus on Health Canadaimproved efficiency, cost management and other regulators maintaininglong-term sustainability, the Company continues to monitor operations to ensure it remains responsive in the current environment.
A variety of factors could cause us not to realize some or all of the expected cost savings, including, among others, delays in the anticipated timing of activities related to our licencescost savings programs, lack of sustainability in cost savings over time, unexpected costs associated with operating our business, our ability to reduce headcount and our ability to achieve profitable operations.the efficiencies contemplated by the business optimization initiatives. We have incurred lossesmay be unable to daterealize all of these cost savings within the expected timeframe, or at all, and there can be no assurancewe may incur additional or unexpected costs in order to realize them. The magnitude of expected cost savings is based upon a number of assumptions and estimates that are in turn based on our products will gain adequate market acceptance oranalysis of the various factors which currently, and could in the future, impact our business. These assumptions and estimates are inherently uncertain and subject to significant business, operational, economic and competitive uncertainties and contingencies. Certain of the assumptions relate to business decisions that are subject to change, including, among others, our anticipated business strategies, our marketing strategies, our product development and licensing strategies and our ability to anticipate and react to business trends. Other assumptions relate to risks and uncertainties beyond our
10
control, including, among others, the economic environment in which we will be ableoperate, cannabis regulation and licensing and other developments in our industry as well as capital markets conditions from time to generate sufficient positive cash flowtime. The actual results of implementing the various cost savings initiatives may differ materially from operationsour estimates if any of these assumptions prove incorrect. Moreover, our continued efforts to meet our capital requirements. Additionally, if Health Canada orimplement these cost savings may divert management attention from the other regulators that have jurisdiction over us were to revoke, suspend, fail to renew or otherwise materially change the termsrest of our licences, such actionbusiness and may preclude us from seeking attractive new product and other opportunities. Additionally, former employees may file lawsuits against us, which may be expensive to defend and could have a significant negative impact onpotentially result in adverse judgements against us. Any of the foregoing may materially and adversely affect our business, results of operations and financial condition, and weliquidity.
Fluctuations in the exchange rate of the Canadian dollar against the U.S. dollar could harm our results of operations.
We may be forcedexposed to reduce or cease our operations or seek relief underfluctuations of the Canadian bankruptcy laws.
Ifdollar against the U.S. dollar because we initiate (orpublish our financial statements in Canadian dollars, while a portion of our assets, liabilities, revenues and costs, including, in particular, assets, liabilities, revenues and costs recorded in connection with our joint venture with SunStream Bancorp Inc. (“SunStream”), are forced to initiate) a bankruptcy filing or other restructuring, (whetherdenominated in or out of court), it is possible that holders of claims and interests with respect to, or rights to acquire, our equity securities, including our common shares, would be entitled to little or no recovery, and those claims and interests may be canceled for little or no consideration. If that were to occur, we anticipate that all or substantially allU.S. dollars. Fluctuations in the exchange rate of the value of all investments inCanadian dollar against the U.S. dollar may have a material adverse effect on our equity securities would be lost and that our equity holders will lose allearnings or substantially all of their investment. It is also possible that our other stakeholders, including our secured and unsecured creditors, will receive substantially less than the amount of their claims.assets when translating U.S. dollars into Canadian dollars.
Risks Related to Our BusinessRegulation and Our IndustryLegal Proceedings
Cannabis for adult use only recently became legalThe industry in Canada. As a result, the industrywhich we operate and the regulations governing the industry are rapidly developing,it continue to develop, and if they develop or change in ways that differ from our expectations or ways that are adverse to us, our business and results of operations may be adversely impacted.
Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the “Cannabis Act”), federally legalized adult-use (non-medical) cannabis in Canada effective as of October 17, 2018. Under the Cannabis Act, each province and territory of Canada has the ability to separately regulate the distribution and sale of cannabis within such province or territory, and the laws (including associated regulations) adopted by each province and territory may vary significantly. Each Canadian province and territory has enacted and implemented regulatory regimes for the distribution and sale of cannabis for adult use; however, there is no guarantee that provincial and territorial legislation regulating the distribution and sale of cannabis for adult use, or the application and enforcement of such legislation, will not change in the future. Any such change could result in significant additional compliance or other costs and may make participation in such markets uneconomical. Since cannabis was only recently legalized in Canada, there may be inconsistencies in the interpretation and enforcement of the Cannabis Act and the Cannabis Regulations (SOR/2018-144) (the “Cannabis Regulations”), and associated provincial and territorial rules and regulations. In addition, Health Canada has experienced delays in approving applications for new licences, capacity expansions and employee security checks, including with respect to the expansion of our Olds Facility and the approval of certain members of our management to perform functions requiring regulatory approval. Additional inconsistencies, changes or delays could have a material adverse effect on our business and results of operations.
In particular, our business model is dependent on additional licensed dispensaries opening in the provinces in which we operate, most importantly Ontario. To the extent there continue to be delays in licensing and opening of legal dispensaries in Ontario and the other provinces, or the legal cannabis market fails to develop as planned, our ability to achieve our near term or long term business objectives would be materially adversely affected.
In addition, regulations are continuing to be developed for different aspects of the adult-use cannabis industry in Canada. For example, on June 26, 2019, Health Canada published amendments to the Cannabis Regulations to expand the permitted formats for products
7
that contain or are derived from cannabis to include edible cannabis, cannabis extracts and cannabis topicals. These regulations came into force on October 17, 2019 and sales of edible cannabis, cannabis extracts and cannabis topicals commenced in December, 2019. While we intend to continue to offer edible cannabis products in accordance with the final rules and regulations, theThe regulations and market for such products and adult-use cannabis, generally may not develop, orvarious cannabis formats and cannabis retail may not develop as we expect or on the timeline that we expect, which could have a material adverse effect on our business and results of operations.
The federalAny adverse changes in regulations, government or judicial interpretation of regulations, or more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licences and provincialother permits and authorizations. Furthermore, governmental authorities may change their administration, application or territorial legislation and regulatory regimes for cannabis products also include excise duties payable by licensed cannabis producers on adult-use cannabis products, in addition to goods and services tax or harmonized sales tax in certain provinces and territories. The rate of the excise duties for cannabis products varies by province and territory. Any significant increase in the rate of excise duties on cannabis products in the future could reduce consumer demands for cannabis products andenforcement procedures at any time, which may adversely impact the adult-use cannabis industry and market in general. In addition, any increase in the rate of excise duties on cannabis products in the future could reduce our margins and profitability in the eventongoing regulatory compliance costs. There is no assurance that we could notwill be able to comply or chose notcontinue to pass along such increases to consumers.comply with applicable regulations.
We are dependent upon regulatory approvals and licences for our ability to grow, process, package, store and sell cannabis and other products derived therefrom as well as to own and operate cannabis retail stores through which we and our franchisees sell cannabis products, and these regulatory approvals are subject to ongoing compliance requirements, reporting obligations and fixed terms requiring renewal.
Our Canadian business operations are dependent on licences issued by Health Canada.Canada as well as those issued by the various provincial regulators having jurisdiction over the provinces in which we operate licensed cannabis retail stores. Our federal licence for our Olds Facility expires on September 14, 2021,February 23, 2027, and our licence for our facility located in Rocky View Alberta (the “Rocky View Facility”),Facility, expires on June 12, 2020.11, 2023. Each of these licences was issued for a period of three years. A holder of a cannabis licence under the Cannabis Act (Canada) (the “Cannabis Act”) and the Cannabis Regulations (Canada) (the “Cannabis Regulations”) must apply to renew its licence on or before the licence expiry date. Following receipt of the renewal application, Health Canada will (i) confirm the security clearance status of all relevant individuals; (ii) confirm the status of fees paid (if applicable) and (iii) confirm the status of licences issued by the Canada Revenue Agency under the Excise Act, 2001 (if applicable). Health Canada may also conduct an inspection to verify compliance or ask the licence holder to provide additional information. A renewed licence with a new expiry date will be issued once Health Canada confirms that all requirements have been met. Cannabis licence holders can apply to renew their licence up to four months before the licence expires. Failure to comply with the requirements of the licences or any failure to renew the licences would have a material adverse impact on us. There can be no guarantee that Health Canada will renew our licences, or that such renewals will occur in a timely fashion or on terms similar to our existing licences or otherwise acceptable to us. Any new facilities or the expansion of our business at existing facilities requires the approval of Health Canada, and there is no guarantee that Health Canada will grant such approvals. Our ability to expand our production capacity depends on our ability to obtain such approvals. Health Canada requires new applicants for cannabis licences under the Cannabis Act to have a fully built site that meets all the requirements of the Cannabis Regulations at the time of their application, as well as satisfying other application criteria. Further, according to Health Canada, it will not substantively review our licence applications until the facilities associated with such licence applications are fully constructed and meet all the requirements of the Cannabis Regulations. Any delay in renewing or granting a licence, revocation of an existing licence, refusal to grant a licence or change in the terms of licence could materially adversely impact our expected future operations.
Pursuant to the Cannabis Act, only industrial hemp or cannabis used for medical or scientific purposes may be imported into or exported from Canada. Any such import or export requires a permit. In the future, we may seek permits to import or export cannabis and cannabis products. If we do not receive the required permits or receive licences with limitations that we do not expect, ourOur ability to importcontinue operating our cannabis cultivation and exportretail cannabis and cannabis products could be materially adversely affected.
Bridge Farm currently holds a hemp cultivation licence granted by the U.K. Home Office at one of its facilities and cultivates hemp in a portion of this facility. This licence was granted on December 28, 2018 andbusiness is set to expire on December 31, 2021, and we intend to seek renewal of this licence with the U.K. Home Office prior to its expiry. The renewal application is submitted online and it takes approximately two to four weeks for the U.K. Home Office to review the application and issue its decision. Bridge Farm also holds a and a high-THC research and development licence, which enables it to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. In addition, Bridge Farm will need additional licences to process hemp and otherwise commercialize any future CBD products. Should the U.K. Home Office not renew or delay the renewal of our licences (or renew our licences on different terms), or fail to grant any future necessary licences, our ability to recognize the strategic objectives of our acquisition of Bridge Farm could be materially adversely affected.
If we expand outside of Canada and the United Kingdom, our ability to operate and sell in foreign jurisdictions will be dependent on our abilitythe good standing of various licences, permits and authorizations from time to obtaintime possessed by us and adherence to all regulatory requirements related to such activities. We will incur ongoing costs and obligations related to regulatory compliance, and any failure to comply with the necessary regulatoryterms of such licences, and requirements. Additional governmentpermits or authorizations, or to renew the licences, may be required in the future in connection with our operations, in addition to other known and unknown permits and approvals which mayauthorizations after their expiry dates, could have a material adverse effect on our business, financial results and operations. There can be required, including with respect to our Canadian, Bridge Farm and other foreign operations. Tono assurance that applicable regulators will extend or renew the extent suchapplicable licences, permits and approvals are required and not obtained, we mayauthorizations, or if extended or renewed, that they will be prevented from operatingextended or expanding our business.
8
We intend to focus primarilyrenewed on the premiumsame or similar terms. In the event that the applicable regulators do not extend or renew the applicable licences, permits and authorizations, or should they renew the applicable licences, permits or authorizations on different terms, any such event or occurrence could have a material adverse effect on our business, financial results and operations.
11
In our retail cannabis segment, our retail licences, permits and authorizations are specific to individual cannabis retail store locations. As our retail business continues to grow, any expansion to or update of our currently operating cannabis retail stores, or the introduction of new cannabis retail stores, will require the approval of the adult-useapplicable cannabis market,regulator. There can be no guarantee that the applicable regulator will approve any such expansions and/or renovations, which may not materialize, or in which we may not be able to develop or maintaincould have a brand that attracts or retains customers.
We intend to focus primarilymaterial adverse effect on users of cannabis in the Canadian adult-use cannabis market who are looking for premium products; however, such a market may not materialize or be sustainable. If this premium market does materialize, we may not be able to achieve or maintain attractive margins and our ability to achieve our near term or long term business, objectives would be materially adversely affected. Further, we may not be successful in creating and maintaining consumer perceptions of the value of our premium products. The promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to the place of sale and subject to prescribed conditions set out in the Cannabis Act and the Cannabis Regulations. Among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding and promotion that is appealing to minors. Such restrictions on advertising, marketing and the use of logos and brand names, and other restrictions on advertising imposed by Canadian federal or provincial laws or regulations, or similar regulations imposed in other jurisdictions, may prevent us from creating and maintaining consumer perceptions in the value of our premium products and establishing ourselves as premium producers. If we cannot successfully enter into or compete in the premium market, we may face significant challenges in gaining or maintaining a market share in Canada or in other cannabis markets in which we intend to operate, or we may be forced to sell our products at a lower price, which may materially adversely affect our results of operations.
Our success depends, in part, on our ability to attractoperations and retain customers who in turn sell to ultimate consumers of cannabis and cannabis-related products. To do this, we are dependent upon, among other things, continually producing desirable and effective products and the continued growth in the aggregate number of adult-use cannabis consumers. We have made significant investments in enhancing our brand to attract consumers. Subject to the applicable legal restrictions, we expect to continue to make significant investments to promote our current products to new consumers and new products to current and new consumers. Such campaigns can be expensive and may not result in increased sales. If we are unable to attract new consumers or retain existing customers, we may not be able to increase our sales or sustain our business.
Our business model, including our ability to successfully target the premium segment of the adult-use cannabis market and maintain our brand, is also dependent on being able to grow at scale different strains of cannabis with consistent yields and THC-levels by strain. To the extent we are unable to do so, or we are unable to achieve desired THC-levels, our ability to achieve our near term or long term business objectives would be materially adversely affected.financial results.
Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.
Our business activities are heavily regulated in all jurisdictions where we do business. Our operations are subject to various laws, regulations and guidelines by governmental authorities, including Health Canada, and the U.K. Home Office, relating to the cultivation, processing, manufacture, marketing, management, distribution, transportation, storage, wholesale and retail sale, packaging, labelling, pricing and disposal of cannabis and cannabis products. In addition, we are subject to laws and regulations relating to employee health and safety, insurance coverage and the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.
Health Canada inspectors routinely assess our production facilities for compliance with applicable regulatory requirements. In addition, we have in the past, and in the future may, self-report violations of regulatory requirements to Health Canada and other regulators. Any failure by us to comply with the applicable regulatory requirements could:
•require extensive changes to our operations;
•result in regulatory or agency proceedings or investigations;
•result in the revocation of our licences and permits, increased compliance costs;
•result in damage awards, civil or criminal fines or penalties;
•result in restrictions on our operations;
•result in Health Canada or other regulators destroying or placing a hold on our inventory;
9
•give rise to material liabilities.
| • | require extensive changes to our operations; |
• | result in regulatory or agency proceedings or investigations; |
• | result in the revocation of our licences, permits and authorizations and increased compliance costs; |
• | result in damage awards, civil or criminal fines or penalties; |
• | result in restrictions on our operations; |
• | result in Health Canada or other regulators destroying, seizing or placing a hold on our inventory; |
• | harm our reputation; or |
• | give rise to material liabilities. |
Further, our employees or other agents may, without our knowledge and despite our efforts, policies and procedures, engage in prohibited conduct under applicable regulatory requirements for which we may be held responsible.
There can be no assurance that any future regulatory or agency proceedings, investigations or audits will not result in substantial costs, a diversion of management’s attention and resources or other adverse consequences to our business.
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all necessary regulatory approvals for the cultivation, processing, production, storage, distribution, transportation, wholesale and retail sale, import and export, as applicable, of our products. Any failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions, including:
•the revocation or imposition of additional conditions on licences to operate our business;
•the suspension or expulsion from a particular market or jurisdiction or of our key personnel;
•the imposition of additional or more stringent inspection, testing and reporting requirements;
•product recalls or seizures; and
•the imposition of fines and censures.
In addition, changes in regulations, government or judicial interpretation of regulations, or more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licences and other permits. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely impact our ongoing regulatory compliance costs. There is no assurance that we will be able to comply or continue to comply with applicable regulations.
Any failure on our or our suppliers’ part to comply with supplier standards established by provincial or territorial distributors could prevent us from accessing certain markets in Canada.
Government-run provincial and territorial distributors in Canada require suppliers to meet certain service and business standards, and routinely assess their suppliers for compliance with these standards. For example, our current supply agreement with the Alberta Gaming, Liquor and Cannabis Commission (the “AGLC”), permits the AGLC to inspect and test our products for compliance with a rigorous set of criteria, including packaging, labelling, timing and stated quality test results. We may pursue arrangements with third parties to produce cannabis on our behalf to supplement internal production. In addition, we use third parties to extract THC and CBD for use in various product offerings, including for use in our vape products. Any failure by us or our third-party suppliers to comply with such standards could result in our being disqualified as a supplier and could lead to the termination or cessation of orders under existing or future supply contracts. Further, provincial and territorial purchasers, including the AGLC, may terminate or cease ordering under existing contracts at any time without cause. If any of the foregoing events were to occur, our access to such markets may be limited or eliminated.
We currently sell, and expect to continue to sell, a significant share of our product to provincial governments through supply contracts that may not generate orders as expected or which may not be renewed.
Under the terms of our licences and the Cannabis Act, we are restricted as to whom we can sell our cannabis products. We currently, and expect to continue to, derive a significant portion of our revenues from supply agreements with Canadian provincial and territorial governments, including AGLC, the Ontario Cannabis Store (the “OCS”), the BC Liquor Distribution Branch (the “BCLDB”), Manitoba Liquor and Lotteries (the “MLL”), Saskatchewan Liquor and Gaming Authority (the “SLGA”), New Brunswick Liquor Corporation (the “ANBL”), Nova Scotia Liquor Corporation (the “NSLC”), PEI Cannabis Management Corporation (the “PEICMC”) and Quebec SQDC (the “SQDC”). We also intend to expand our offerings to other provincial and territorial governments across Canada.
10
Our provincial or territorial supply agreements do not contain purchase commitments or otherwise obligate the purchaser to buy a minimum or fixed volume of products from us. As a result, the amount of cannabis that the AGLC, the OCS, the BCLDB, MLL, SLGA, ANBL, NSLC, PEICMC or SQDC or, collectively, Provincial Buyers, may purchase under our supply agreements, or its price, may deviate significantly from our expectations. In addition, our results of operations could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the Provincial Buyers and any other future government purchasers. If any of the Provincial Buyers decides to purchase lower volumes of products from us than we expect, charges “slotting fees” in connection with carrying our products, charges additional taxes, insists on a price that is lower than we expect, alters its purchasing patterns at any time with limited notice, decides not to continue or begin to purchase our cannabis products at all or does not renew its agreement with us on similar terms or other terms acceptable to us, our results of operations could be materially adversely affected. In addition, if the legal distributions channels in Canada for cannabis do not develop either because of delays in the opening of dispensaries or otherwise, our results of operations would be materially adversely affected.
We experience significant customer concentration, with a limited number of customers accounting for a significant portion of our revenues.
Our top five customers accounted for 81% for the year ended December 31, 2019. Of these customers, four customers have each accounted for more than 10% of our revenues for such period. Inherent risks exist when a large percentage of total revenues is concentrated with a limited number of customers.
It is not possible for us to predict the future level of demand for our products that will be generated by these customers or the future demand for the products of these customers in the consumer marketplace. In addition, revenues from these large customers may fluctuate from time to time based on market demand for our products among consumers, the level which may be affected by market conditions or other factors, some of which may be outside of our control. Further, our contracts with these large customers do not contain purchase commitments or otherwise obligate the purchasers to buy a minimum or fixed volume of products from us. If any of our major customers experience declining or delayed sales of our products to consumers due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our products, reduce the volume of products we supply to such customers or we could lose the customer. Additionally, although historically, our reserves for doubtful accounts have not been material, if any of our large customers were to suffer financial instability, they could refuse or delay payment of outstanding receivables. Any such development may have a material adverse effect on our business, results of operations and financial condition.
The legal cannabis market is a relatively new industry (including the recent introduction of additional Canadian cannabis regulations, or Cannabis 2.0). As a result, the size of our target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.
Because the cannabis industry is in a nascent stage, there is a lack of information about the total addressable market as well as comparable companies available for potential investors to review in deciding about whether to invest in us. In addition, the development of the legal cannabis market is dependent on Health Canada and other regulators approving licences for retail stores and other distribution channels in a timely fashion. Any delays in such approvals or other regulatory developments may impact our market and price estimates, which may make it difficult to develop reliable expectations and assumptions. Accordingly, investors should rely on their own estimates regarding the potential size, economics and risks of the cannabis market in deciding whether to invest in our common shares. We are an early-stage company that has not generated net income. There can be no assurance that our growth estimates are accurate or that the cannabis market will be large enough for our business to be profitable or to grow as projected.
Although we are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets or products, if any, will be commercially viable or successfully produced and marketed. We must rely largely on our own market research to forecast sales and design products as detailed forecasts and consumer research are not generally obtainable from reliable third-party sources in Canada and in other international jurisdictions.
In addition, there is no assurance that the industry and market will continue to exist and grow as currently estimated or anticipated or function and evolve in the manner consistent with management’s expectations and assumptions. We could also be subject to other events or circumstances that that adversely affect the cannabis industry, such as the imposition of further restrictions on sales and marketing or further restrictions on sales in certain areas and markets
The adult-use cannabis market in Canada has experienced, and may in the future experience, supply and demand fluctuations.
11
Following legalization, there was a shortfall in supply in the Canadian adult-use cannabis market leading to increased prices, increases in out-of-stocks and the consumers opting to buy cannabis on the illicit market. We and other licensed producers responded by increasing capacity. Recently, the increase in production combined with slower than expected retail store growth has resulted in over-supply. As inventory levels become greater than consumer demand, we have had to, and may in the future have to, engage in sale of excess inventory at discounted prices, which could significantly impair operating results and our brand image. Conversely, if we underestimate demand for our products, we may experience inventory shortages, which might delay shipments to customers, reduce revenue, negatively impact customer relationships and diminish brand loyalty. For example, we have experienced shortages and out-of-stocks in our vape products due to supply constraints. In addition, demand for cannabis and cannabis products is dependent on a number of social, political and economic factors that are beyond our control, including the novelty of legalization, which may wear off. A material decline in the economic conditions affecting consumers can cause a reduction in disposable income for the average consumer, change consumption patterns and result in a reduction in spending on cannabis products or a switch to other products obtained through illicit channels. There can be no assurance that market demand for cannabis will continue to be sufficient to support our current or future production levels or that we will be able to generate sufficient revenue to be profitable.
We are dependent upon a limited number of facilities that are integral to our business.
As of the date of this Annual Report, all our cultivation and production activities are conducted at our Olds Facility and Rocky View Facility, and our licences from Health Canada are specific to those facilities. Disruptions at, or adverse changes or developments affecting, our Olds Facility or Rocky View Facility, including municipal rezoning, facility design errors, environmental pollution, equipment or process failures, production errors, disease or infestation of our crops, fires, breakdowns of our sewage system, explosions, power failures, natural disasters or security failures, have had and could have negative impacts on our production, the quality of our products, our reputation in the market and our financial results – any one of which could materially adversely impact our business. For example, a fire at our Olds Facility in December 2018 damaged a portion of our crops and caused some delays in our production cycle. In addition, any failure to comply with regulatory requirements under the Cannabis Act could result in the suspension or termination of our Health Canada licences and could have an adverse impact on our ability to renew such licences.
Any expansion on current facilities or future development and construction of new facilities would increase our cultivation, growing, processing and distribution capacity; however, licensing or construction delays or cost over-runs in respect to the development of these facilities could delay, diminish or prevent our ability to produce cannabis at these facilities. Furthermore, we are required to fully construct such facilities or expansions and ensure that such facilities or expansions are compliant with the requirements of the Cannabis Regulations prior to receiving Health Canada approval. There is no guarantee that Health Canada will approve new development projects or future construction at any of our existing facilities and any delay or failure to receive approval could adversely affect our business and results of operations. The final costs relating to any development or construction of our facilities may be significantly greater than anticipated, in which case we may be required to curtail or delay such development or construction projects, which could reduce our planned production capacity. In addition, we may be required to raise additional capital, which may not be available on acceptable terms or at all.
In addition, we do not currently have extraction capabilities and, until we develop such capabilities, we will be reliant on third parties to extract THC and CBD for use in various product offerings. Such third-party extraction may cost more than we anticipate, which would negatively impact our margins. In addition, such third-party extraction may not be delivered on schedule, meet our standards of quality or comply with applicable regulatory requirements, any of which may cause inventory shortages and cause us to fail to deliver certain offerings on a timely basis or at all. Similarly, we may rely on third parties to manufacture vaporizers and other consumption accessories product offerings on our behalf (or we may license our brands to thirty-party manufacturers). Such third-parties may fail to deliver product offerings that meet our or our customers’ expectations, and we may have difficulty obtaining satisfactory products in sufficient quantities or at all. Any interruption in the supply or consistency of these products may adversely impact our ability to deliver products to our customers, may harm our relationships and reputation with our customers, and may have a material adverse effect on our business, results of operations and financial condition.
We currently rely on a limited number of suppliers for our extraction requirements.
Although we have recently commenced extraction activities at our facility at Olds, we currently and may continue to depend on a limited number of suppliers for extracting THC and CBD for use in certain of our cannabis products. We cannot ensure that these suppliers will remain in business, have sufficient capacity or supply to meet our needs or that they will not be purchased by one of our competitors or another company that is not interested in continuing to work with us. Our use of single-source suppliers exposes us to several risks, including disruptions in supply, price increases or late deliveries. There are, in general, relatively few alternative sources of supply for substitute components. Our current vendors may be unable or unwilling to meet our future demands for our supply needs. Establishing additional or replacement suppliers for these components, materials and processes could take a substantial amount of time and it may be difficult to establish replacement suppliers who meet regulatory requirements. Any disruption in supply from
12
any single-source supplier or service provider could lead to supply delays or interruptions, which would damage our business, financial condition, prospects and results of operations.
If we were to have to switch to a replacement supplier, the manufacture and delivery of our product candidates or components of our product candidates could be interrupted for an extended period, which could adversely affect our business. Furthermore, although we are developing our own extraction capabilities, there is no guarantee that we will be successful in doing so or that we will have sufficient capacity to meet our supply needs. We may not be able to quickly establish additional or replacement suppliers for our extraction needs, if required. If we are able to find a replacement supplier, the replacement supplier would need to be licensed by Health Canada, which might require additional regulatory authority approval, which could result in further delay. While we seek to maintain adequate inventory of the single source components and materials used in our products, any interruption or delay in the supply of components or materials or our inability to obtain components or materials from alternate sources at acceptable prices, or at all, in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.
Our reliance on these suppliers, service providers and manufacturers subjects us to a number of risks that could harm our reputation, business, financial condition, prospects and results of operations, including, among other things:
delays to the development timelines for our products;
• | the revocation or imposition of additional conditions on licences, permits and authorizations to operate our business; |
interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;
• | the suspension or expulsion from a particular market or jurisdiction or of our key personnel; |
delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component;
• | the imposition of additional or more stringent inspection, testing and reporting requirements; |
a lack of long-term supply arrangements for key components with our suppliers;
• | product recalls or seizures; and |
inability to obtain adequate supply in a timely manner or to obtain adequate supply on commercially reasonable terms;
• | the imposition of fines and censures. |
difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner;
production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;
delay in delivery due to our suppliers prioritizing other customer orders over ours;
damage to our reputation caused by defective components produced by our suppliers; and
fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
If any of these risks materialize, our costs could significantly increase and our ability to meet demand for our products could be impacted.
We are constrained by law in our ability to market our products in Canada.
The development of our business and operating results may be hindered by applicable restrictions on production, sales and marketing activities imposed on us and other licensed producers under the Cannabis Act by Health Canada. All products we distribute into the Canadian adult-use market are subject to restrictions with respect to product formats, product packaging and labelling. In addition, the Cannabis Act regulates our marketing activities, including prohibitions on testimonials and endorsements, lifestyle branding, and promotion that is appealing to young persons. Each Canadian province and territory has also enacted regulatory regimes for the distribution and sale of cannabis for adult-use purposes within its jurisdiction. As such, our portfolio of brands and products must be specifically tailored, and our marketing activities carefully structured, to comply with individual provincial and territorial rules and regulations. These restrictions may preclude us from establishing our branding, achieving pricing differentiation, effectively marketing our cannabis products or competing for market share, and may impose costs on us that cannot be absorbed through increased selling prices for our cannabis products.
Trade of cannabis for non-medical purposes within Canada may be restricted by the Canadian Free Trade Agreement.
We have entered into supply agreements with the Provincial Buyers for the supply of adult-use cannabis and cannabis derivative products. We have also been cleared by the SLGA to supply cannabis to retail and wholesale permit holders in Saskatchewan. The Canadian Free Trade Agreement, which generally reduces or eliminates the barriers to the free movement of persons, goods, services, and investments within Canada, specifically excludes cannabis for non-medical purposes from its scope and instead leaves the intra-Canadian movement of non-medical cannabis to future negotiations among the provinces and territories. There is a risk that the outcome of the negotiations will result in the interprovincial and interterritorial trade of cannabis for non-medical purposes in Canada being entirely restricted or subject to conditions that will negatively impact our ability to sell cannabis in provinces and territories in which we do not have cultivation and production facilities, including those in which we have already executed agreements or been approved to supply cannabis to retailers.
1312
We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.
We were incorporated in 2006, began cultivating cannabis in 2012, and started selling cannabis in 2018 after the federal legalization of adult-use cannabis in Canada. We have yet to generate an annual profit. We generated a net loss of $271.6 million, $56.5 million for the fiscal years ended December 31, 2019 and 2018, respectively, and had negative operating cash flows for each of these periods. Our accumulated deficit as of December 31, 2019 was $360.3 million. Although we have announced business optimization initiatives and temporarily suspended construction of certain facilities, we will continue to expend significant funds to maintain our growing and production capacity, fund certain planned capital investments, invest in research and development, expand our marketing and sales operations and meet the increased compliance requirements associated with our operation as a public company. We expect the aggregate amount of our operating expenses will continue to increase, and we may not achieve or maintain profitability.
We are an early-stage company, and our efforts to grow our business may be more costly than we expect and we may not generate enough revenue to offset our operating expenses. We have incurred, and may in the future incur, significant losses for a number of reasons, including as a result of unforeseen expenses, difficulties, complications and delays in obtaining governmental licences and the other factors and risks described in this Annual Report. The amount of any future losses will depend, in part, on our ability to generate revenue on the one hand and any increases in our expenses on the other hand. If we continue to incur losses in the future, the net losses and negative cash flows incurred to date, together with any such future losses, will have an adverse effect on our shareholders’ equity and working capital. Because of the numerous risks and uncertainties associated with our business and industry, we are unable to accurately predict when, or if, we will be able to achieve profitability. Even if we achieve profitability at some point in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market price of our common shares may significantly decrease and our ability to raise capital, expand our business or continue our operations may be impaired. A decline in the value of our common shares may also cause you to lose all or part of your investment.
In addition, our consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business. Our present level of indebtedness and our significant accumulated losses as well as a number of other factors present challenges to our ability to comply with the covenants in the agreements governing our indebtedness and management anticipates that our available cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy the our liquidity requirements for the next 12 months. As a result, we require additional funding to meet our ongoing obligations and to fund anticipated operating losses and no assurance can be given that future sources of capital will be available.
Our business is or may become subject to a variety of U.S.laws related to controlled substances and foreign laws, manymoney laundering, the application of which areto our business is unsettled and still developing and which could subject us to claims or otherwise harm our business.
In the United States, despite cannabis having been legalized for medical use or adult use in a number of states, cannabis and cannabis products, other than hemp and certain hemp-derived products, such as CBD, continue to be categorized at the federal level as a Schedule I controlled substance under the Controlled Substances Act (“CSA”), and subject to the Controlled Substances Import and Export Act, as amended (“CSIEA”). We believe that we are not subject to the CSA or CSIEA, because we have no business operations in the United States, and we do not distribute any products in the United States. Nonetheless, we are or may become subject to various other U.S. federal laws and regulations, including in connection withas result of the listing of our common shares on the Nasdaq Global SelectCapital Market (“Nasdaq”), and violationslending and providing other financial services to cannabis companies engaging in the adult-use cannabis business in the United States (whether directly or through SunStream). Violations of any U.S. federal laws or regulations, including the CSA and CSIEA, to which we may be found to be subject, whether intentionally or inadvertently, could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings initiated by either the U.S. federal government or private citizens or criminal charges, including disgorgement of profits, cessation of business activities or divestitures. Further, the status of cannabis as a Schedule I controlled substance may cause us, and our business, to be negatively perceived by prospective U.S. investors or other parties, who may incorrectly believe that the CSA or CSIEA apply to us, or who may have reputational or other concerns about dealings with a cannabis grower even if it is not conducting business in, or distributing any products in the United States.States, which may limit our ability to access capital in private or public capital markets. For further information about the risks related to U.S. federal laws and regulations with respect to SunStream’s operations, see “—Risks related to our investments—Cannabis remains illegal under U.S. federal law. Strict enforcement of federal laws regarding cannabis would likely result in SunStream’s inability to execute its business plan and may subject us to significant civil or criminal liability and other adverse consequences.”
We also are, or expect tomay become, subject to a variety of laws and regulations in Canada, the United States the United Kingdom, the European Union and elsewhere that prohibit money laundering, including the Proceeds of Crime and Terrorist Financing Act (Canada), the U.S. Money Laundering Control Act, (United States), as amended, the UK Bribery Act 2010, the UK Proceeds of Crime Act 2002, Directive (EU) 2015/849 and the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by governmental authorities in Canada, the United States the United Kingdom, the European Union or any other jurisdiction in which we may in the future have or are developing business operations or to which we may in the future export. Although we believe that none of our activities implicate any applicable money laundering statutes, in the event that any of our business activities, any dividends or distributions therefrom, or any profits or revenue accruing thereby are found to be proceeds of crime under one or more of the statutes described above or any other applicable legislation, any persons, including investors, found to be aiding and abetting us in such violations could be subject to criminal or civil liability. Any violations of these laws, or allegations of such violations, could
14
disrupt our operations, significantly distract management and involve significant costs and expenses, including legal fees. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures.
Our business is also subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are, or will become, subject to the anti-bribery laws of any other countries in which we conduct or will conduct business, and as a company listed on a national securities exchange in the United States, we are subject to the Federal Corrupt Practices Act of 1977, as amended. Our employees or other agents may, without our knowledge and despite our efforts, policies and procedures, engage in prohibited conduct under anti-bribery laws for which we may be held responsible. Our policies mandate compliance with these anti-corruption and anti-bribery laws; however, there can be no assurance that our internal controls and procedures will protect us from liability for the recklessness, fraudulent behavior, dishonesty or other inappropriate acts of our affiliates, employees, contractors or agents. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences.
We may be unsuccessful in competing in the overall legal adult-use cannabis market in Canada and any other countries we intend to operate in.
Our Canadian adult-use business faces enhanced competition from others who are licensed under the Cannabis Act to participate in the adult-use cannabis industry. The Cannabis Act has established a licensing regime for the cultivation, production, processing, testing, packaging, labelling, delivery, transportation, distribution, sale, possession and disposal of cannabis for adult use. Pursuant to transitional provisions in the Cannabis Act, existing holders of medical cannabis licences under the Access to Cannabis for Medical Purposes Regulations have, subject to satisfying certain requirements, automatically been deemed licensed under the Cannabis Act for corresponding activities, and other individuals and corporations are now able to apply for such licences.
Subject to certain restrictions set out in the Cannabis Act, adults are permitted to cultivate, propagate, harvest and distribute up to four cannabis plants per household. If a significant number of individuals take advantage of the ability to cultivate and use their own cannabis, our success in the adult-use business may be limited and may not fulfill our expectations.
As of March 25, 2020, approximately 350 licences were issued by Health Canada. Certain of these competitors have longer operating histories and significantly greater financial, production, marketing, research and development and technical and human resources than we do. Some of these competitors have become public companies in the United States or Canada, giving them the ability to raise significant amount of capital quickly or use their publicly traded equity securities to conduct acquisitions. In addition, many other competitors have established retail locations. As a result, our competitors may be able to bring more and better products to market more quickly than us. Our commercial opportunity in the adult-use market could be reduced or eliminated if our competitors produce and commercialize products for the adult-use market that, among other things, are safer, more effective, more convenient, better quality or less expensive than the products that we produce, have greater sales, marketing and distribution support than our products, enjoy enhanced timing of market introduction and perceived effectiveness advantages over our products and receive more favorable publicity than our products. If our adult-use cannabis products do not achieve an adequate level of acceptance by the adult-use cannabis market, we may not generate sufficient revenue from these products, and our adult-use cannabis business may not become profitable. We expect that competition in the adult-use cannabis market and other cannabis markets in which we expect to participate will become more intense as current and future competitors begin to offer an increasing number of diversified products. As competition increases, we may experience downward price pressure on our cannabis products, loss of market share and increased marketing costs. To remain competitive, we will require a continued high level of investment in research and development, marketing, sales and client support, and we may not have sufficient resources to maintain such efforts.
We also face competition from the illicit cannabis market. Illegal dispensaries and ‘black market’ operations and participants, despite not having a valid licence under the Cannabis Regulations, command a significant percentage of the total market for cannabis and cannabis products in Canada and may be able to (i) offer products with higher concentrations of active ingredients, including THC, than permitted by the Cannabis Act and Cannabis Regulations or offered in the legal market, (ii) use delivery methods, that licensed producers are prohibited from offering to individuals in Canada, (iii) brand products more explicitly, (iv) sell products at lower prices and (v) market and distribute products in ways not permissible by law. As these illicit market participants do not comply with the regulations governing the cannabis industry in Canada, their operations may also have significantly lower costs.
As well, the legal landscape for medical and adult-use cannabis is changing internationally. An increasing number of jurisdictions globally are passing laws that allow for the production and distribution of medical or adult-use cannabis. Increased international competition, including competition from suppliers in other countries who may be able to produce at lower cost, and limitations placed on us by Canadian or other regulations, might lower the demand for our products on a global scale.
15
Consumer preferences may change, and we may be unsuccessful in acquiring or retaining consumers and keeping pace with changing market developments.
As a result of changing consumer preferences, many consumer products attain financial success for a limited period of time. Even if our products find success at retail, there can be no assurance that such products will continue to be profitable. Our success will be significantly dependent upon our ability to develop new and improved product lines and adapt to consumer preferences. Even if we are successful in introducing new products or developing our current products, a failure to gain consumer acceptance or to update products could cause a decline in our products’ popularity and impair our brand. In addition, we may be required to invest significant capital in the creation of new product lines, strains, brands, marketing campaigns, packaging and other product features—none of which are guaranteed to be successful. Failure to introduce new features and product lines and to achieve and sustain market acceptance could result in us being unable to satisfy consumer preferences and generate revenue.
Our success depends on our ability to attract and retain consumers. There are many factors which could impact our ability to attract and retain consumers, including our ability to continually produce desirable and effective products, the successful implementation of our consumer acquisition plan and the continued growth in the aggregate number of potential consumers. Our failure to acquire and retain consumers could have a material adverse effect on us.
The legal cannabis industry is in its early stages of development and it is likely that we, and our competitors, will seek to introduce new products in the future. In attempting to keep pace with any new market developments, we may need to spend significant amounts of capital in order to successfully develop and generate revenues from new products we introduce. As well, we may be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. We may not be successful in developing effective and safe new products, anticipating shifts in social trends and consumer demands, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may have a material adverse effect on our business and results of operations.
In addition, the patterns of cannabis consumption in Canada and elsewhere in the world may shift over time due to a variety of factors, including changes in demographics, social trends, public health polices and other leisure or consumption behaviors. If consumer preferences for our products or cannabis products in general do not develop, or if once developed they were to move away from our products or cannabis products in general, or if we are unable to anticipate and respond effectively to shifts in consumer behaviors, we may be adversely affected.
Legalization of cannabis in Canada may have an adverse impact on our ability to develop and grow a medical cannabis business in Canada.
Adult-use cannabis was legalized in October 2018 and the full effect of that on the Canadian medical cannabis market remains unknown. If medical-use consumers decide to purchase products available in the adult-use market instead of continuing to purchase them under the medical use regime, our ability to develop and grow a medical cannabis business in Canada may be negatively affected.
We, or the cannabis industry more generally, may receive unfavorable publicity or become subject to negative consumer or investor perception.
We believe that the cannabis industry is highly dependent upon positive consumer and investor perception regarding the benefits, safety, efficacy and quality of cannabis and cannabis products. Such categories of products having previously been commonly associated with various other narcotics, violence and criminal activities, and there is a risk that our business might attract negative publicity. Perception of the cannabis industry and cannabis products, currently and in the future, may be significantly influenced by scientific research or findings, regulatory investigations or proceedings, litigation, political statements, media attention and other publicity (whether or not accurate or with merit) both in Canada and in other countries relating to the benefits and risks of consuming cannabis or cannabis products, including unexpected safety or efficacy concerns or the activities of industry participants. There can be no assurance that future scientific research, findings, regulatory investigations or proceedings, litigation, political statements, media attention or other research findings or publicity will be favorable to cannabis or cannabis products. Adverse future scientific research reports, findings, regulatory investigations or proceedings, and political statements, that are, or litigation, media attention or other publicity that is, perceived as less favorable than, or that questions, earlier research reports, findings or publicity (whether or not accurate or with merit) could result in a significant reduction in the demand for cannabis or cannabis products. Further, adverse publicity reports or other media attention regarding the use of cannabis for medical purposes or consumption of cannabis with physical or mental illness or other negative effects or events, the safety, efficacy and quality of cannabis or cannabis products generally, as well
16
as our current or future products and facilities, specifically could adversely affect us. Adverse publicity could arise even if the adverse effects associated with cannabis-use resulted from consumers’ failure to use such products legally, appropriately or as directed.
There is also a risk that the actions of other companies and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and, thereby, negatively impact our reputation. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share negative opinions and views in Canada and elsewhere in regard to our activities and the cannabis industry in general, whether true or not. The legal restrictions with respect to labelling and marketing cannabis may exacerbate these risks by increasing the influence of social media users and prohibiting us from effectively responding to negative publicity.
We do not ultimately have direct control over how we or the cannabis industry is perceived by others. Reputational issues may result in decreased investor confidence, declines in our stock price, litigation, difficulty in obtaining financing, increased challenges in developing and maintaining community relations and present an impediment to our overall ability to advance our business strategy and grow our business.
The vape market is a new market that is still evolving and is subject to significant uncertainty, including as a result of recent negative press and regulatory scrutiny of vape products in the United States.
In connection with Cannabis 2.0, we have begun selling vape products in Canada. In Canada, vape products are regulated under the Cannabis Act and associated regulations, and such regulations were drafted prior to the recent reports of vaping-related deaths and illnesses in the United States. As a result, Health Canada or the individual provinces may amend or further review the rules governing vape products and restrict or prohibit sales of such products. For example, the AGLC delayed the legalization of vaping products in Alberta and, currently, vaping products are illegal in Quebec and Newfoundland. There can be no assurance that we will be able to meet any additional compliance requirements or regulatory restrictions, or remain competitive in the face of unexpected changes in market conditions.
There is a limited history and volume of research on the health effects of vaping, electronic cigarettes and other similar products. If the medical community were to determine that vaping or use of any of related products caused or posed a risk of long-term health risks, market demand for these products and their use could materially decline. Such a determination could expose us to litigation and result in increased regulation. Furthermore, vaping products sold on the illicit market that contain harmful chemicals or other ingredients may adversely impact the demand for such products in the legal market and create the perception that such products were dangerous. In addition, regulators may prohibit the sale of vaping products all together or severely restrict their use. A decline in the market demand for our vaping products, product liability claims and increased regulation could have a material adverse effect on our business.
We may not be able to store or transport our cannabis products to customers in a safe, timely and cost-efficient manner, and we may experience breaches of security at our facilities or loss as a result of theft of our products.
Because of the nature of our products and the limited legal channels for distribution, as well as the concentration of inventory in our facilities, we are subject to a heightened risk of theft of our product and other security breaches.
Canadian adult-use distribution rules take various forms on a jurisdiction-by-jurisdiction basis and often require us to employ third parties to deliver our products to central government sites. Any prolonged disruption of third-party transportation services could have a material adverse effect on our sales volumes or our end users’ satisfaction with our products. Rising costs associated with third-party transportation services used by us to ship our products may also adversely impact our profitability.
The security of our products during transportation to and from our facilities is of the utmost concern. A breach of security at our Olds Facility, Rocky View Facility or, once completed, one of our future facilities, or during transport or delivery, could result in the significant loss of product as well as customers and may expose us to additional liability, including regulatory fines, litigation or increased expenses relating to the resolution and future prevention of similar events. Any failure to take steps necessary to ensure the safekeeping of our cannabis could also have an impact on our ability to continue operating under our existing licences, to renew or receive amendments to our existing licences or to receive required new licences.
17
There has been limited study on the health effects of cannabis and cannabis products, including vaping products, and future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the benefits, viability, safety, efficacy, dosing and social acceptance of such products.
Research in Canada, the United States and internationally regarding the benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids, such as CBD and THC, remains in relatively early stages. Few clinical trials on the benefits and risks of cannabis or isolated cannabinoids have been conducted.
Future research and clinical trials may draw opposing conclusions to statements contained in the articles, reports and studies currently favored, or could reach different or negative conclusions regarding the benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical or adult-use cannabis, which could adversely affect social acceptance of cannabis and the demand for our cannabis products.
We may not be successful at transitioning and growing the business of Bridge Farm or leveraging Bridge Farm’s existing retail relationships, and we may not be able to recoup our investment in Bridge Farm.
Transitioning and growing the business of Bridge Farm over the longer-term will require continued investment in Bridge Farm’s operations, which may be significant. We currently intend to proceed with the completion of phase 2 of Bridge Farm’s Clay Lake facility located in Spalding, Lincolnshire, United Kingdom, the (“Clay Lake Phase 2 facility”), and we may invest incremental capital into Bridge Farm’s production facilities to transition certain facilities to the cultivation of hemp plants and high-THC cannabis. There is no assurance that we will be able to successfully transition Bridge Farm’s facilities to the cultivation of hemp and high-THC cannabis plants or complete the Clay Lake Phase 2 facility on a timely manner or within budget or successfully develop CBD or medical cannabis products from such plants. Although Bridge Farm has longstanding relationships with retailers in the United Kingdom, we may not be able to maintain and leverage such relationships or such relationship, may change. Retailers with which Bridge Farm has existing commercial relationships have not agreed to and may choose not to sell our CBD products or may only sell our products on terms that we do not view as advantageous. Moreover, retailers could choose to sell our CBD products in the United Kingdom but not in other countries. In addition, although Bridge Farm currently cultivates hemp in a portion of one of its facilities, it has not previously manufactured, produced or sold hemp or CBD products. Such efforts may not prove successful or profitable. In addition, we do not currently have extraction capabilities and, until we develop such capabilities, we will be reliant on third parties to extract CBD for use in various product offerings. Such third-party extraction may cost more than we anticipate, which would negatively impact our margins. In addition, such third-party extraction may not be delivered on schedule, meet our standards of quality or comply with applicable regulatory requirements, any of which may cause inventory shortages and cause us to fail to deliver certain offerings on a timely basis or at all. Furthermore, we will need additional licences to commercialize any future CBD products in the United Kingdom or elsewhere.
Bridge Farm’s business and future capital requirements will depend on many factors, including: the successful integration of Bridge Farm and its personnel, our ability to transition certain of Bridge Farm’s facilities to the cultivation of hemp and high-THC cannabis and production of CBD, consumer trends in the United Kingdom, European Union and elsewhere regarding the use of CBD products, regulatory developments with respect to the cannabis industry in the United Kingdom, European Union and elsewhere, the development of new products and offerings and maintaining and expanding customer relationships. We may not have sufficient capital to fund these activities and may not be able to obtain financing on acceptable terms or at all.
The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets. There is no guarantee that we will be able to complete a transaction with respect to Bridge Farm on terms acceptable to us or at all. In addition, it is unlikely we will be able to recoup our investment in Bridge Farm as part of such process.
We will be exposed to risks relating to the laws of various countries as a result of any international expansion.
We may expand our operations to various countries, including the United Kingdom and other European countries. As a result of these expansions, we may become exposed to various levels of political, economic, legal, regulatory and other risks and uncertainties associated with operating in or exporting to these jurisdictions. These risks and uncertainties include changes in the laws, regulations and policies governing the production, sale and use of cannabis and cannabis-based products, political instability, currency controls, fluctuations in currency exchange rates and rates of inflation, labor unrest, changes in taxation laws, regulations and policies, restrictions on foreign exchange and repatriation and changing political conditions and governmental regulations relating to foreign investment and the cannabis business more generally.
18
Changes, if any, in the laws, regulations and policies relating to the advertising, production, sale and use of cannabis and cannabis-based products or in the general economic policies in these jurisdictions, or shifts in political attitude related thereto, may adversely affect the operations or profitability of our international operations in these countries. Specifically, our operations may be affected in varying degrees by government regulations with respect to labelling, branding, marketing, health warnings, production, price controls, export and import controls, controls on currency remittance, increased income taxes, restrictions on foreign investment, land and water use restrictions and government policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction. Failure to comply strictly with applicable laws, regulations and local practices could result in additional taxes, costs, civil or criminal fines or penalties or other expenses being levied on our international operations, as well as other potential adverse consequences such as the loss of necessary permits or governmental approvals or the inability to grow our business in these jurisdictions.
Furthermore, although we may expand production of hemp at certain of Bridge Farm’s facilities in the United Kingdom with a view toward facilitating exports of future CBD products to countries in the European Union, there is no assurance that these countries will authorize the import of our CBD products from the United Kingdom, or that the United Kingdom will authorize or continue to authorize such exports, or that an ability to export products from the United Kingdom into the European Union will provide us with any advantage. In February 2020, the UK Food Standards Agency (FSA) stated that CBD suppliers must receive a “novel food” approval by March 31, 2021 to sell CBD products in retail locations or such products will be removed from stores. New entrants, like Bridge Farm, will not be able to sell products without first receiving approval. There is no guarantee that Bridge Farm will receive such approval and any failure to receive such approval may materially adversely affect our business. Each country in the European Union (or elsewhere) may impose restrictions or limitations on imports that require the use of, or confer significant advantages upon, producers within that particular country. As a result, we may be required to establish production facilities similar to Bridge Farm in one or more countries in the European Union where we wish to distribute our products in order to gain access to these markets or to take advantage of the favorable legislation offered to producers in these countries.
We must rely on international advisors and consultants in the foreign countries in which we intend to operate.
The legal and regulatory requirements in the foreign countries in which we intend to operate with respect to the cultivation and sale of cannabis, banking systems and controls, as well as local business culture and practices are different from those in Canada. Our officers and directors must rely, to a great extent, on local legal counsel and consultants in order to keep abreast of material legal, regulatory and governmental developments as they pertain to and affect our business operations, and to assist with governmental relations. We must rely, to some extent, on those members of management and the board of directors who have previous experience working and conducting business in these countries, if any, to enhance our understanding of and appreciation for the local business culture and practices. We also rely on the advice of local experts and professionals in connection with current and new regulations that develop in respect of the cultivation and sale of cannabis as well as in respect of banking, financing, labor, litigation and tax matters in these jurisdictions. Any developments or changes in such legal, regulatory or governmental requirements or in local business practices are beyond our control.
The United Kingdom’s departure from the European Union could adversely affect our ability to execute on our plans for the Bridge Farm facilities.
In June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, commonly referred to as “Brexit,” which was consummated on January 31, 2020. The United Kingdom has until December 31, 2020 to reach and ratify a new agreement with the European Union which, among other things, would include terms of trade. However, there can be no assurance regarding the duration of such negotiations or the terms thereof. Any withdrawal agreement reached could significantly disrupt the free movement of goods, services, and people between the United Kingdom and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. There may be similar referendums or votes in other European countries in which we may do business. The uncertainty surrounding the terms of the United Kingdom’s withdrawal and its consequences, as well as the impact of any similar circumstances that may arise elsewhere in Europe, could increase our costs and adversely impact consumer and investor confidence, and the level of consumer discretionary purchases, including purchases of our products. Furthermore, regulatory changes could harm our interest in Bridge Farm by raising the cost of input goods, increasing the cost to export or import between the United Kingdom and the European Union, or imposing other limits on the movement of goods or services.
The hemp and CBD product markets are new and heavily regulated with rules subject to rapidly changing laws and uncertainty, compliance with which may come with significant cost.
The markets for the production of hemp and CBD products are competitive and evolving. Continued development of the hemp and CBD product markets within the broader cannabis industry will be dependent upon new legislative authorization of such products. Any number of events or occurrences could slow or halt progress altogether in these industries. While the progress of the hemp and
19
CBD product markets is currently encouraging, growth of such markets is not assured. Numerous factors may impact or negatively affect the lawmaking process within the various jurisdictions where we have business interests. Any one of these factors could slow or halt the use of hemp or CBD products, which could negatively impact our business and possibly cause us to discontinue the related operations as a whole.
In Canada, the new Industrial Hemp Regulations, or IHR, under the Cannabis Act replaced the previous Industrial Hemp Regulations under the Controlled Drugs and Substances Act on October 17, 2018. The regulatory scheme for industrial hemp largely remains the same; however, the IHR permits the sale of hemp to federally licensed cannabis processors under certain circumstances, and licensing requirements were softened in accordance with the perceived lower risk posed by industrial hemp. The IHR defines industrial hemp as a cannabis plant, or any part of that plant, in which the concentration of THC is 0.3% by weight or less in the flowering heads and leaves. In Canada, cannabis products containing CBD are subject to the Cannabis Act and the Cannabis Regulations. Not every activity involving industrial hemp falls within the scope of the IHR. For example, the extraction of CBD or another phytocannabinoid from the flowering heads, leaves and branches of the plant falls under the Cannabis Regulations and requires a cannabis processing licence.
In the EU, legislative approaches to the regulation of CBD products vary country by country, including local regulations with respect to THC content, and continue to evolve; however, EU-wide rules require products to contain no more than 0.2% THC. There is no assurance that any EU country will authorize or continue to authorize exports, imports, cultivation or production of hemp or CBD products. If any of these local laws or regulations prevent or discourage us from achieving our business goals, they may have an adverse effect upon our operations or restrict our ability to produce or sell products in the future.
In the United States, the Agriculture Improvement Act of 2018, or the Farm Bill, removed hemp-derived CBD containing less than 0.3% THC from the list of scheduled narcotics in December 2018 if certain conditions relating to its production are satisfied; however, the U.S. Food and Drug Administration (the “FDA”), and the United States Department of Agriculture have asserted their authority to regulate hemp-derived products in the United States. In addition, many states regulate hemp and hemp-derived products, including CBD. In particular, the FDA has declared that it is illegal under the U.S. Federal Food, Drug, and Cosmetic Act to market or sell CBD products as dietary supplements or to market or sell food to which CBD has been added, absent the issuance of an authorizing regulation by the FDA. In March 2019, the FDA formed a task force to develop legislation proposals regarding the regulation of CBD. Until regulations surrounding hemp and hemp-derived products are clarified in the United States, there will be substantial uncertainty around hemp and hemp-derived CBD, and the viability of the market for any such products.
The shifting compliance environment with respect to the hemp and CBD products and the need to build and maintain robust systems to comply with different regulations in multiple jurisdictions increases the possibility that we may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines or the curtailment or restructuring of our operations.
The hemp and CBD product markets in Canada, the European Union and elsewhere are also subject to many of the same risks as the adult-use cannabis industry and market.
The hemp and CBD product markets in Canada, the European Union and elsewhere are subject to many of the same risks that are applicable to the broader cannabis industry and adult-use cannabis market, including risks related to the need for regulatory approvals, the early status and uncertain growth of the industry, agricultural farming, consumer acceptance and perception of hemp-derived products, competition, regulations regarding labelling, branding and marketing and the lack of clinical studies regarding the benefits, viability, safety, efficacy and dosing of such products.
Third parties with whom we do business may perceive themselves as being exposed to reputational risk as a result of their relationship with us.
The parties with whom we do business, or would like to do business with, may perceive that they are exposed to reputational risk as a result of our business activities relating to cannabis, which could hinder our ability to establish or maintain business relationships or raise capital. These perceptions relating to the cannabis industry may interfere with our relationship with service providers in Canada and other countries.
20
We may seek to enter into extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships, or expand the scope of currently existing relationships, with third parties that we believe will have a beneficial impact on us, and there are risks that such strategic alliances or expansions of our currently existing relationships may not enhance our business in the desired manner.
We currently have, and may expand the scope of, and may in the future enter into, extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships with third parties that we believe will complement or augment our existing business and create additional revenue streams, including leasing any unused or excess facility space to other licensed producers. Our ability to complete additional arrangements is dependent upon, and may be limited by, among other things, the availability of suitable candidates and capital. In addition, such third-party arrangements could present unforeseen integration obstacles or costs, may not enhance our business and may involve risks that could adversely affect us, including the investment of significant amounts of management time that may be diverted from operations in order to pursue and complete such transactions or maintain such relationships. Future third-party arrangements could result in the incurrence of debt, costs and contingent liabilities, cross-contamination, damage to our products or facilities and harm to our brand, and there can be no assurance that future such arrangements will achieve, or that our existing arrangements will continue to achieve, the expected benefits to our business or that we will be able to consummate future arrangements on satisfactory terms, or at all.
Our contracts with other licensed producers may expose us to additional costs and negatively impact our results of operations.
We derive a significant portion of our revenue from sales of cannabis flower to other licensed producers in Canada. Our supply contracts with these other licensed producers contain provisions governing, among other things, the quality and THC-content of the cannabis supplied and the manner, time and place of such delivery. We have experienced issues with such supply agreements, including a legal dispute with one of our customers resulting from our failure to timely deliver product and the provision of additional product at no cost to another customer due to a disagreement over the THC-content of product supplied. In addition, we have a contract with another licensed producer to purchase a minimum amount of cannabis every month until 2038 at agreed upon prices and subject to certain revenue sharing arrangements. Such contract requires us to purchase such cannabis even if we have an excess supply of inventory (as we are currently experiencing). Issues with our contracts, including disagreements with our counterparties and any resulting publicity, and failure to comply with such agreements may have an material adverse impact on our results of operation and business. In addition, we are exposed to the credit risk of the licensed producers to which we sell. If any of our licensed producer-customers were to suffer financial difficulty, including bankruptcy, our business and liquidity may be materially adversely affected.
We may not be able to successfully identify and execute future acquisitions or dispositions or to successfully manage the impacts of such transactions on our operations.
We may seek strategic acquisitions in the future. Our ability to identify, consummate and integrate effectively any future potential acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary, our ability to obtain financing on satisfactory terms, if at all. Any such activities may require, among other things, various regulatory approvals, licences and permits and there is no guarantee that all required approvals, licences and permits will be obtained in a timely fashion or at all. Acquisitions may expose us to additional risks including: difficulties in integrating administrative, financial reporting, operational and information systems; difficulties in managing newly acquired operations and improving their operating efficiency; difficulties in maintaining uniform standards, controls, procedures and policies through all our operations; difficulties entering into markets in which we have little or no direct experience; difficulties in retaining key employees of the acquired operations; and disruptions to our ongoing business. In addition, future acquisitions could result in the incurrence of additional debt, costs, and contingent liabilities. For example, we incurred a $100.3 million goodwill impairment related to our acquisition of Bridge Farm. We may also incur costs for and divert management attention to potential acquisitions that are never consummated. For acquisitions that are consummated, expected synergies may not materialize.
We are subject to risks inherent in an agricultural business, including the risk of crop failure.
The cultivation of cannabis, herbs and ornamental flowers are agricultural processes. As such, our business is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, fire, plant diseases and similar agricultural risks. Although we currently grow our products indoors under climate-controlled conditions, there can be no assurance that natural elements, such as extreme weather, insects and plant diseases, will not entirely interrupt our production activities or have an adverse effect on our business. In addition, cannabis plants, including cannabis, herbs and ornamental flowers, can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. We have had to dispose of crops in the past due to pathogens. Such instances often lead to reduced crop quality, stunted growth or death of the plant. Moreover, cannabis, including hemp, is “phytoremediative”, meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted. Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. In addition, we have experienced, and may in the future experience, production issues at our facilities, including poor crop yields, harvests of product with THC concentration that is too low to meet product specifications, fires, floods and contamination of our product from foreign objects. As a result of the foregoing, our products
21
may not be suitable for commercialization, our products may be returned to us by our customers, and we may have to destroy the applicable portions of our crops.
Natural disasters, unusual weather, pandemic outbreaks such as COVID-19, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results.
The occurrence of one or more natural disasters, such as hurricanes, floods and earthquakes, unusually adverse weather, pandemic outbreaks of influenza and other highly communicable diseases or viruses, such as the COVID-19 virus, boycotts and geo-political events, such as civil unrest in countries in which our operations are located and acts of terrorism, or similar disruptions could adversely affect our business, financial condition, liquidity and results of operations. These events could result in physical damage to one or more of our properties, increases in fuel or other energy prices, the temporary or permanent closure of one or more of our facilities or our customers, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products from suppliers, the temporary disruption in the transport of goods, delay in the delivery of goods to and from our facilities, and disruption to our information systems.
In March 2020, as a result of the COVID-19 pandemic, Alberta declared a state of emergency and ordered the closure of schools and certain other public facilities. Alberta also amended its rules around paid sick leave to allow full and part-time employees to take 14 days of job-protected leave if they are required to self-isolate or caring for a dependent that is required to self-isolate. In addition, Sundial announced enhanced safety protocols at its Canadian and U.K. facilities, staffing measure changes and implemented remote work procedures for its corporate staff. Such measures and government mandates may not be effective and one or more of our employees may get sick and may come to work infected, necessitating a short or long-term closure of the affected facilities, disrupting production. Such measures and mandates may also increase our expenses and otherwise impair our production levels or cause us to close or severely limit production at our facilities. Further, legal cannabis dispensaries in Canada may close voluntarily or be forced to close by the provincial governments, reducing our ability to distribute cannabis. Consumer demand for cannabis and our other products may be reduced as a result of reductions in consumers’ disposable income associated with lay-offs and work or pay limitations due to mandatory social distancing and lockdown measures implemented by governments in the geographies where we operate. Production limitations or stoppages, social distancing measures and other impediments affecting our suppliers, partners or producers of goods, such as vape hardware, should they materialize, may make it difficult, more costly, or impossible for Sundial to produce or distribute cannabis, conduct quality testing, extract cannabis oils, or otherwise market and sell its products. For example, we have experienced delays in shipment of vape cartridge hardware for our products from China. Limitations on the function of Health Canada and other regulators as a result of remote work of its employees or redeployment of its resources to addressing the pandemic may delay our communications with the regulatory authorities and delay renewal of our existing licences or the receipt of additional licences required for our operations, should such licences be sought. Bridge Farm is facing similar challenges, conditions and risks in the United Kingdom, including cancellation of deliveries of flowers and plants by retailers, which has resulted in lost revenue. In addition, at least one employee at Bridge Farm has tested positive for the COVID-19 virus and is being attended to by health professionals. Although we do not expect to close the Bridge Farm facilities, we have taken additional precautions and plan to reduce operations at Bridge Farm starting April 1, 2020. There can be no guarantee that we will not have to suspend operations at Bridge Farm for a significant period of time. If macroeconomic conditions continue to worsen in Canada, the United Kingdom and the rest of the world, demand for cannabis and our other products may significantly decline and industry participants, including our customers and suppliers, may face financial hardship. In addition, the increased market volatility resulting from global business and economic disruption related to the pandemic and measures to contain it has made it more difficult for companies to access capital markets. Such volatility has hampered, and may in the future hamper, Sundial’s efforts to secure additional financing or amendments to its credit agreements. The duration and severity of the COVID-19 pandemic is currently unknown and the pandemic may continue for a significant period of time. Any of the foregoing may adversely affect our financial position, results of operations and liquidity. The longer the pandemic continues, the more severe such impacts may be.
We have undergone changes to management and our board of directors as well as implemented business optimization initiatives — all of which may distract from our operation of the business and may not the be successful.
On January 30, 2020, we announced certain changes to our executive team and board of directors, including the resignation of Torsten Kuenzlen as our Chief Executive Officer and a member of our board of directors, the resignation of Edward Hellard as our Executive Chairman, the appointment of one of our directors, Zach George, as Chief Executive Officer, and the promotion of Andrew Stordeur as President and Chief Operating Officer.
Due to the early-stage nature of our business and our strategy, our success is largely dependent on the performance of our management team as well as our ability to continue to attract, develop, motivate and retain highly qualified and skilled employees. Consequently, the loss of any member of management or other key operational employees may have a substantial effect on our future success or failure. We do not currently maintain key-person insurance on the lives of any of our key employees. Experienced personnel in the
22
cannabis industry, or personnel with other industry experience transferrable to the cannabis industry, are in high demand and competition for their talents is intense. As a result of the foregoing, we have incurred, and may incur in the future, significant costs to attract and retain employees.
In addition, in response to slower than expected regulatory approvals of new retail stores and delays in some cannabis 2.0 products, we implemented several cost savings and business optimization initiatives, including the enhancement of facility workflows and processes, realignment of product lines and product formats to areas of stronger demand, workforce optimization and a heightened discipline in cost management. As of the date of this Annual Report, a substantial portion of these initiatives have been implemented, with cost reductions expected to be realized beginning in the first quarter of 2020. As part of the leadership team's focus on improved efficiency, cost management and long-term sustainability, the Company will continue to monitor operations to ensure it remains responsive in the current environment.
A variety of factors could cause us not to realize some or all of the expected cost savings, including, among others, delays in the anticipated timing of activities related to our cost savings programs, lack of sustainability in cost savings over time, unexpected costs associated with operating our business, our ability to reduce headcount and our ability to achieve the efficiencies contemplated by the business optimization initiatives. We may be unable to realize all of these cost savings within the expected timeframe, or at all, and we may incur additional or unexpected costs in order to realize them. In such event, we may have difficulty complying with the terms of our indebtedness. The magnitude of expected cost savings are based upon a number of assumptions and estimates that are in turn based on our analysis of the various factors which currently, and could in the future, impact our business. These assumptions and estimates are inherently uncertain and subject to significant business, operational, economic and competitive uncertainties and contingencies. Certain of the assumptions relate to business decisions that are subject to change, including, among others, our anticipated business strategies, our marketing strategies, our product development and licensing strategies and our ability to anticipate and react to business trends. Other assumptions relate to risks and uncertainties beyond our control, including, among others, the economic environment in which we operate, cannabis regulation and licensing and other developments in our industry as well as capital markets conditions from time to time. The actual results of implementing the various cost savings initiatives may differ materially from our estimates if any of these assumptions prove incorrect. Moreover, our continued efforts to implement these cost savings may divert management attention from the rest of our business and may preclude us from seeking attractive new product and other opportunities. Additionally, former employees may file lawsuits against us, which may be expensive to defend and could potentially result in adverse judgements against us. Any of the foregoing may materially and adversely affect our business, results of operations and liquidity.
Directors and certain key employees of a licensed producer must obtain and maintain a security clearance from Health Canada. Certain of our directors and key employees have not yet obtained such clearance. There is no assurance that any of our existing directors or employees who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one.
Each director and certain key employees of a company that holds a licence for cultivation, processing or sale under the Cannabis Regulations is subject to the requirement to obtain and maintain a security clearance from Health Canada. Certain additional key personnel are also required to obtain and maintain a security clearance. Under the Cannabis Regulations, a security clearance cannot be valid for more than five years and must be renewed before the expiry of a current security clearance. All of our directors and executive officers have obtained security clearance from Health Canada with the exception of Greg Mills and Bryan Pinney (two of our directors) and Zach George (our Chief Executive Officer and director). There is no assurance that any of our existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations or loss of our licences. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance required by the Cannabis Act in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all. Furthermore, the Cannabis Regulations require us to designate a qualified individual in charge who is responsible for supervising transactions with cannabis, which individual must meet certain educational and security clearance requirements. Moreover, depending on the activity, under current regulations a qualified person in charge or an individual with security clearance must be physically present in a space where other individuals are conducting activities with cannabis. If our current designated qualified person in charge fails to maintain his security clearance, or if our current designated qualified person in charge leaves us and we are unable to find a suitable replacement who meets these requirements, we may no longer be able to conduct activities with respect to the cultivation, production or sale of cannabis
23
Significant interruptions in our access to certain key inputs such as labor, raw materials, electricity, water and other utilities may impair our growing operations and materially affect our business.
Our business is dependent on a number of key inputs and their related costs, including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Any significant interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, loss of any energy subsidies, rising or volatile energy costs could curtail or preclude our ability to continue production and may have a material adverse impact on our business and results of operations. Certain of our energy subsidies were contingent on our ability to meet certain milestones by January 31, 2020. While we believe we have met all milestones and have made application for all subsidies, there is no assurance that subsidies will continue or that our outstanding applications will be approved. In addition, our operations could be significantly affected by a prolonged power outage. Furthermore, our cultivation operations require a significant amount of electricity as a result it may be difficult for us to locate areas to construct additional cultivation operations as we grow.
Our ability to compete and grow cannabis and other plants is dependent on us having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that we will be successful in maintaining our required supply of labor, equipment, parts and components.
Our headquarters, Olds Facility and Rocky View Facility, are in Alberta, a province whose economy has historically relied heavily on the oil and gas industry. As we are currently in an oil and gas downturn, we may temporarily have increased access to labor and benefit from lower employment expenses. If the oil and gas industry recovers and begins hiring in large numbers, we may face increased competition for employees, which could harm our ability to attract and retain employees or increase our compensation costs.
The valuation of our biological assets is subject to certain assumptions and estimates.
Pursuant to IFRS, we measure the value of our biological assets (consisting of plants in various stages of vegetation) using the income approach at fair value less costs to sell up to the point of harvest. As market prices are generally not available for biological assets while they are growing, we are required to make assumptions and estimates relating to, among other things, expected harvest yields, selling prices and costs to sell. The assumptions and estimates used to determine the fair value of biological assets, and any changes to such prior estimates, directly affect our reported results of operations. If actual yields, prices, costs, market conditions or other results differ from our estimates and assumptions, there could be material adjustments to our results of operations. In addition, the use of these future estimated metrics differs from US GAAP. As a result, our financial statements and reported earnings are not directly comparable to those of similar companies in the United States.
Failure in our quality control systems may adversely impact our sales volume, market share and profitability.
The quality and safety of our products are critical to the success of our business and operations. As such, it is imperative that our (and our service providers’) quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by the design of the quality control systems, the quality training program, and adherence by employees to quality control guidelines. Although we strive to ensure that all of our service providers have implemented and adhere to high caliber quality control systems, we could experience a significant failure or deterioration of such quality control systems. If, as a result of a failure in our (or our service providers’) quality control systems, contamination of, or damage to, our inventory or packaged products occurs, we may incur significant costs in replacing, destroying or repurposing such inventory, providing replacement products to our customers or recalling such products. We may be unable to meet customer demand and may lose customers who have to purchase alternative brands or products. In addition, consumers may lose confidence in our products whether affected or not and our brand may be materially damaged. A loss of sales volume from a contamination event may occur, and such a loss may affect our ability to supply our current customers and to recapture their business in the event they are forced to switch products or brands, even if on a temporary basis. We may also be subject to legal action as a result of a contamination, which could result in negative publicity and negatively impact our results of operations. During this time, our competitors may benefit from an increased market share that could be difficult and costly to regain.
Our products may be subject to recalls or returns for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of consumer goods products are sometimes subject to the recall or return of their products for a variety of reasons, including public health and public safety risks, product defects, such as contamination, adulteration, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. Although we have detailed procedures in place for testing our finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid product returns, recalls, regulatory action or lawsuits, whether frivolous or otherwise. While we have not been subject to a recall to date, if any of the products produced by us are recalled in the future due to an
24
alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. In addition, from time to time we have customers return our products alleging, among other things, contamination and failure to meet designated specifications. As a result of any such recall or return, we may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall or return may require significant management attention, expose us to liabilities or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls and returns may lead to increased scrutiny of our operations by Health Canada or other regulatory agencies, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of such products, including products sold by us.
We may be subject to product liability claims or regulatory action if our products are alleged to have caused significant loss, injury or death, which is exacerbated by the fact that cannabis use may increase the risk of serious adverse side effects.
As a manufacturer and distributor of products which are ingested or otherwise consumed by humans, we face the risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused loss, injury or death. We may be subject to these types of claims due to allegations that our products caused or contributed to injury, illness or death, made false, misleading or impermissible claims, failed to include adequate labelling and instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. This risk is exacerbated by the fact that cannabis use may increase the risk of developing schizophrenia and other psychoses, symptoms for individuals with bipolar disorder, and other side effects. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could also occur. In addition, the manufacture and sale of cannabis products, like the manufacture and sale of any ingested or consumable product, involves a risk of injury to consumers due to tampering by unauthorized third parties or product contamination. We may in the future have to recall certain of our cannabis products as a result of potential contamination and quality assurance concerns. A product liability claim or regulatory action against us could result in increased costs and could adversely affect our reputation and goodwill with our consumers. There can be no assurance that we will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.
We may be subject to liability claims as a result of positive testing for THC or banned substances.
Our products are made from cannabis and contain varying levels of THC. THC is banned in many jurisdictions and heavily regulated in many others. Moreover, regulatory frameworks for legal amounts of consumed THC is evolving. Whether or not ingestion of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to end users who test positive for trace amounts of THC attributed to use of our products, including future CBD products. Positive tests may adversely affect the end user’s reputation, ability to obtain or retain employment and participation in certain athletic or other activities. A claim or regulatory action against us based on such positive test results could adversely affect our reputation.
We rely on third-party distributors to distribute our products, and those distributors may not perform their obligations.
We rely on third-party distributors, including provincial regulatory boards and private retailers, and may in the future rely on other third parties, to distribute and sell our products to consumers. If these distributors do not successfully carry out their contractual duties, if there is a delay or interruption in the distribution of our products or if these third parties damage our products, it could negatively impact our revenue from product sales. Furthermore, any damage to our products, such as product spoilage, could expose us to potential product liability, damage our reputation and the reputation of our brands or otherwise harm our business and results of operations.
We may not be able to obtain adequate insurance coverage in respect of the risks we and our business face, the premiums for such insurance may not continue to be commercially justifiable or there may be coverage limitations and other exclusions which may result in such insurance not being sufficient to cover potential liabilities that we face.
We currently have insurance coverage, including product liability, business interruption and property insurance, protecting many, but not all, of our assets and operations. Our insurance coverage is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities, including potential litigation and product liability claims, or will be generally available in the future or, if available, that premiums will be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance
25
or were in excess of policy limits, we may be exposed to material uninsured liabilities that could impede our liquidity, profitability or solvency.
If we are not able to comply with all safety, health and environmental regulations applicable to our operations and industry, we may be held liable for any breaches of those regulations.
Safety, health and environmental laws and regulations affect nearly all aspects of our operations, including product development, working conditions, waste disposal, emission controls, the maintenance of air and water quality standards and land reclamation, and, with respect to environmental laws and regulations, impose limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Compliance with safety, health and environmental laws and regulations can require significant expenditures, and failure to comply with such safety, health and environmental laws and regulations may result in the imposition of fines and penalties, the temporary or permanent suspension of operations, the imposition of clean-up costs resulting from contaminated properties, the imposition of damages and the loss of or refusal of governmental authorities to issue permits or licences to us. Exposure to these liabilities may arise in connection with our existing operations, our historical operations and operations that may in the future be closed or sold to third parties. We could also be held liable for worker exposure to hazardous substances and for accidents causing injury or death. There can be no assurance that we will at all times be in compliance with all safety, health and environmental laws and regulations notwithstanding our attempts to comply with such laws and regulations.
Changes in applicable safety, health and environmental standards may impose stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. We are not able to determine the specific impact that future changes in safety, health and environmental laws and regulations may have on our industry, operations or activities and our resulting financial position; however, we anticipate that capital expenditures and operating expenses will increase in the future as a result of the implementation of new and increasingly stringent safety, health and environmental laws and regulations. Further changes in safety, health and environmental laws and regulations, new information on existing safety, health and environmental conditions or other events, including legal proceedings based upon such conditions or an inability to obtain necessary permits in relation thereto, may require increased compliance expenditures by us.
We are, and may become, subject to litigation, regulatory or agency proceedings, investigations and audits.
We are, and may in the future become, subject to litigation, regulatory or agency proceedings, investigations and audits from time to time, some of which may adversely affect our business. Should any litigation, regulatory or agency proceeding, investigation or audit in which we become involved be determined against us, such a decision could, among other impacts, adversely affect our ability to continue operating without more onerous restrictions or at all, adversely affect our financial condition and results of operations, harm our reputation, or reduce the value or market price for the common shares and could require the use of significant resources.shares. Even if we are involved in litigation, regulatory or agency proceedings, investigations and audits and are ultimately successful, they can require the redirection of significant resources and may also create a negative perception of our brand.
13
For example, in 2019, we entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under a supply agreement and agreed to pay penalties in the amount of $1.7 million.
Additionally, we have received notice of a legal proceeding commenced against us in the province of Quebec by another licensed cannabis producer alleging breach of a supply agreement and have filed a statement of defence.defense. We have recorded a reserve in the amount of $1.5$2.6 million at December 31, 20192021 in respect of this matter. All litigation steps have been completed, including discoveries and our filing of a defense, and the parties are awaiting to be called by the court to schedule the trial.
In connection with our initial public offering (“IPO”), we and certain of our current and former officers and directors, as well as the underwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019actions that alleged violations of securities laws. For further detail in respect of ongoing legal proceedings, please see the section of this Annual Report entitled “Legal Proceedings and November 1, 2019. The cases have been consolidated in two separate actions depending on the court in which they were first filed, one in the Supreme Court of New York, New York County, captioned In re Sundial Growers Inc. Securities Litigation, Index No. 655178/2019, and the other in the United States District Court for the Southern District of New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC. The complaints in each of the two consolidated actions assert claims under Sections 11, 12(a)(2), and 15 of the U.S. Securities Act of 1933, as amended (the “Securities Act”). They generally allege that the we made material misstatements and omissions in the prospectus and registration statement in connection with the IPO with respect to, among other things, the failure to disclose systemic quality control issues as well as the return of cannabis and termination of the supply agreement by one of the Company’s customers. Additionally, we have received a threat of litigation from an investor in our Senior Convertible Notes.Regulatory Actions.”
While we intend to defend ourselves vigorously in all pending and future legal proceedings, we may settle certain matters for strategic reasons, as a part of a resolution of other matters or in order to avoid potentially worse consequences arising from inherently uncertain
26
judicial or administrative processes. Moreover, regardless of the merits of our defenses, if we are unable to resolve certain legal proceedings or regulatory actions, indirect consequences arising from unproven allegations or appealable regulatory findings may have adverse consequences to us. The outcome of any litigation, regulatory or agency proceedings investigations and audits is inherently uncertain. Unfavorable rulings, judgmentsjudgements or settlement terms could have a material adverse impact on our business, liquidity and results of operations.
We are incorporated in the Province of Alberta and enforcement of actions may be difficult.
We are incorporated under the laws of the Province of Alberta and our head office is located in the Province of Alberta. All of our directors and officers and some of the experts named in this Annual Report are residents of Canada or otherwise reside outside of the United States, and a substantial portion of their assets and our assets are located outside the United States. Consequently, it may be difficult for investors in the United States to bring an action against such directors, officers or experts or to enforce against those persons or us a judgment obtained in a United States court predicated upon the civil liability provisions of U.S. federal securities laws or other laws of the United States.
We may be subject to risks related to our information technology systems, including the risk that we may be the subject of a cyberattack and the risk that we may be in non-compliance with applicable privacy laws.
We have entered into agreements with third parties for hardware, software, telecommunications and other information technology, or IT, services in connection with our operations. Our operations depend, in part, on how well we and our vendors protect networks, equipment, IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism or theft. Our operations also depend on the timely maintenance, upgrade and replacement of networks, equipment and IT systems and software, as well as preemptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays or increases in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact us.
We are subject to various laws relating to the use of customer information and other personal and confidential information and any non-compliance may result in material adverse consequences to our business.
We collect, process, maintain and use data, including sensitive personal information on individuals, available to us through online activities and other customer interactions with our business. Our current and future marketing programs may depend on our ability to collect, maintain and use this information, and our ability to do so is subject to evolving laws and enforcement trends in Canada and other jurisdictions. There are a number of laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the privacy rules under the Personal Information Protection and Electronic Documents Act (Canada) (“PIPEDA”), and similar laws in other jurisdictions, protect medical records and other personal health information by limiting their use and the disclosure of health information to the minimum level reasonably necessary to accomplish the intended purpose. We collect and store personal information about our patients and are responsible for protecting that information from privacy breaches. A privacy breach may occur through a procedural or process failure, an IT malfunction or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated through employee collusion or negligence or through deliberate cyberattack. Moreover, if we are found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the confidentiality of patient health information, including as a result of data theft and privacy breaches, we could be subject to sanctions and civil or criminal penalties, which could increase our liabilities and harm our reputation.
Certain of our marketing practices rely upon e-mail, social media and other means of digital communication to communicate with consumers on our behalf. We may face risk if our use of e-mail, social media or other means of digital communication is found to violate applicable laws. We post our privacy policy and practices concerning the use and disclosure of user data on our website. Any failure by us to comply with our posted privacy policy, anti-spam legislation or other privacy-related laws and regulations could result in proceedings which could potentially harm our business. In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. If applicable data privacy and marketing laws become more restrictive at the international, federal, provincial or state levels, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e-commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance burden and our potential reputational harm or liability for security breaches may increase.
The Canadian excise duty framework may affect profitability.
The federal and provincial or territorial legislation and regulatory regimes for cannabis products include excise duties payable by licensed cannabis producers on adult-use cannabis products, in addition to goods and services tax or harmonized sales tax in certain provinces and territories. We currently hold licences issued by the Canada Revenue Agency (“CRA”) required to comply with this excise framework. The rate of the excise duties for cannabis products varies by province and Bridge Farm have had material weaknessesterritory. Any significant increase in the rate of excise duties on cannabis products in the future and any restrictive interpretations by the CRA or the courts of the regulatory-like restrictions contained in the Excise Act, 2001 (Canada) (which may be different than those contained in the Cannabis Act) could reduce consumer demands for cannabis products and adversely impact the adult-use cannabis industry and market in general. In addition, any increase in the rate of excise duties on cannabis products in the future could reduce our margins and profitability in the event that we could not or chose not to pass along such increases to consumers.
We are constrained by law in our internal control over financial reportingability to market our products in Canada.
The development of our business and operating results may be hindered by applicable restrictions on production, sales and marketing activities imposed on us and other licensed producers and cannabis retailers. All products we distribute into the Canadian adult-use market are subject to restrictions with respect to product formats, product packaging and labelling. In addition, the Cannabis Act regulates our marketing activities, including prohibitions on testimonials and endorsements, lifestyle branding, and promotion that is appealing to young persons. Each Canadian province and territory has also enacted regulatory regimes for the distribution and sale of cannabis for adult-use purposes within its jurisdiction. As such, our portfolio of brands, products and services must be specifically tailored, and our managementmarketing activities carefully structured, to comply with individual provincial and territorial rules and regulations.
14
These restrictions may preclude us from establishing our branding, achieving pricing differentiation, effectively marketing our cannabis products or competing for market share, and may impose costs on us that cannot be absorbed through increased selling prices for our cannabis products.
Risks Related to Cannabis Operations Segment
We face competition from the illegal cannabis market.
We face competition from the illegal dispensaries that are unlicensed and unregulated, and otherwise from illegal market participants, who sell cannabis and cannabis products, including products with higher concentrations of active ingredients, use flavors or other additives that we are prohibited from using, or engage in distribution, advertising and promotion activities in which we are not permitted to engage, use delivery methods that we are prohibited from offering to individuals in Canada, sell products at lower prices, brand products more explicitly, or sell at lower prices. As these illegal market participants do not comply with the regulations governing the cannabis industry, their operations may also have significantly lower costs. The perpetuation of the illegal market for cannabis may have a material adverse effect on our business, results of operations, as well as the perception of cannabis use.
We currently sell, and expect to continue to sell, a significant share of our product to provincial governments through supply contracts that may not generate orders as expected or which may not be ablerenewed.
Under the terms of our production licences issued pursuant to successfully implement adequate internalthe Cannabis Act, we are restricted as to whom we can sell our cannabis products. We currently derive, and expect to continue to derive a significant portion of our revenues from supply agreements with Canadian provincial and territorial governments, including AGLC, the Ontario Cannabis Store (the “OCS”), the BC Liquor Distribution Branch (the “BCLDB”), Manitoba Liquor and Lotteries (the “MLL”), Saskatchewan Liquor and Gaming Authority (the “SLGA”), New Brunswick Liquor Corporation (the “ANBL”), Nova Scotia Liquor Corporation (the “NSLC”), PEI Cannabis Management Corporation (the “PEICMC”) and Quebec SQDC (the “SQDC”). We also intend to expand our offerings to other provincial and territorial governments across Canada.
Our provincial or territorial supply agreements do not contain purchase commitments or otherwise obligate the purchaser to buy a minimum or fixed volume of products from us and allow the purchaser broad latitude to return product to us. As a result, the amount of cannabis that the AGLC, the OCS, the BCLDB, MLL, SLGA, ANBL, NSLC, PEICMC or SQDC, (collectively, the “Provincial Buyers”) may purchase under our supply agreements, or its price, may deviate significantly from our expectations. In addition, our results of operations could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the Provincial Buyers and any other future government purchasers as well as the return of unsold products. If any of the Provincial Buyers decides to purchase lower volumes of products from us (or return more products) than we expect, charges “slotting fees” in connection with carrying our products, charges additional taxes, insists on a price that is lower than we expect, alters its purchasing patterns at any time with no or limited notice, decides not to continue or begin to purchase our cannabis products at all or does not renew its agreement with us on similar terms or other terms acceptable to us, our results of operations could be materially adversely affected. We have in the past, and may in the future, offer price discounts and other promotions to the Provincial Buyers to promote the movement of slower selling products or as the result of price compression in the market. We also record return provisions in our financial statements based on the estimated likelihood of having additional slow-moving and aged product returned. If we underestimate the magnitude of such return provisions, our results of operation would be negatively affected. In addition, if the legal distributions channels in Canada for cannabis do not continue to develop in accordance with our expectations, either because of delays in the opening of dispensaries or otherwise, our results of operations would be materially adversely affected.
We experience significant customer concentration, with a limited number of customers accounting for a significant portion of our revenues.
Our top five customers in the cannabis operations segment accounted for 78% for the year ended December 31, 2021. Of these customers, three customers have each accounted for more than 10% of our revenues for such period. Inherent risks exist when a large percentage of total revenues is concentrated with a limited number of customers.
It is not possible for us to predict the future level of demand for our products that will be generated by these customers or the future demand for the products of these customers in the consumer marketplace. In addition, revenues from these large customers may fluctuate from time to time based on market demand for our products among consumers, the level which may be affected by market conditions or other factors, some of which may be outside of our control. Further, our contracts with these large customers do not contain purchase commitments or otherwise obligate the purchasers to buy a minimum or fixed volume of products from us (and allow these customers to return product to us for a variety of reasons). If any of our major customers experience declining or delayed sales of our products to consumers due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our products, reduce the volume of products we supply to such customers, we could lose the customer or have a substantial amount of product returned to us. Additionally, if any of our large customers were to suffer financial instability, they could refuse or delay payment of outstanding receivables. Any such development may have a material adverse effect on our business, results of operations and financial condition.
15
Any failure on our or our retail store suppliers’ part to comply with supplier standards established by provincial or territorial distributors could prevent us from accessing certain markets in Canada.
Government-run provincial and territorial distributors in Canada require suppliers to meet certain service and business standards, and routinely assess their suppliers for compliance with these standards. For example, our current supply agreement with the AGLC permits the AGLC to inspect and test our products for compliance with a rigorous set of criteria, including packaging, labelling, timing and stated quality test results. We use third parties to extract delta-9-tetrahydrocannabinol (“THC”) and hemp-derived cannabidiol (“CBD”) for use in various product offerings, including for use in our vape products. Any failure by us or our third-party suppliers to comply with such standards could result in our being disqualified as a supplier and could lead to the termination or cessation of orders under existing or future supply contracts. If any of the foregoing events were to occur, our business, financial condition and results of operations could be materially adversely impacted.
We, or the cannabis industry more generally, may receive unfavorable publicity or become subject to negative consumer or investor perception.
We believe that the cannabis industry is highly dependent upon positive consumer and investor perception regarding the benefits, safety, efficacy and quality of cannabis and cannabis products. Such categories of products having previously been commonly associated with various other narcotics, violence and criminal activities, and there is a risk that our business might attract negative publicity. Perception of the cannabis industry and cannabis products, currently and in the future, may be significantly influenced by scientific research or findings, regulatory investigations or proceedings, litigation, political statements, media attention and other publicity (whether or not accurate or with merit) both in Canada and in other countries relating to the benefits and risks of consuming cannabis or cannabis products, including unexpected safety or efficacy concerns or the activities of industry participants. There can be no assurance that future scientific research, findings, regulatory investigations or proceedings, litigation, political statements, media attention or other research findings or publicity will be favorable to cannabis or cannabis products. Adverse future scientific research reports, findings, regulatory investigations or proceedings, and political statements, that are, or litigation, media attention or other publicity that is, perceived as less favorable than, or that questions, earlier research reports, findings or publicity (whether or not accurate or with merit) could result in a significant reduction in the demand for cannabis or cannabis products. Further, adverse publicity reports or other media attention regarding consumption of cannabis being associated with physical or mental illness or other negative effects or events, the safety, efficacy and quality of cannabis or cannabis products generally, as well as our current or future products and facilities, specifically could adversely affect us. Adverse publicity could arise even if the adverse effects associated with cannabis-use resulted from consumers’ failure to use such products legally, appropriately or as directed.
There is also a risk that the actions of other companies and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and, thereby, negatively impact our reputation. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share negative opinions and views in Canada and elsewhere in regard to our activities and the cannabis industry in general, whether true or not. The legal restrictions with respect to labelling and marketing cannabis may exacerbate these risks by increasing the influence of social media users and prohibiting us from effectively responding to negative publicity.
We do not ultimately have direct control over financial reportinghow we or disclosure controlsthe cannabis industry is perceived by others. Reputational issues may result in decreased investor confidence, declines in our stock price, litigation, difficulty in obtaining financing, increased challenges in developing and procedures.maintaining community relations and may otherwise present an impediment to our overall ability to advance our business strategy and grow our business.
Proper systems of internal control over financial reporting and disclosure controls and procedures are criticalWe may be subject to additional risks if we expand our cannabis operations internationally.
We may in the future expand our cannabis operations internationally, including to the operation ofUnited States, by importing or exporting cannabis products, establishing cultivation operations in other jurisdictions or otherwise. Pursuant to the Cannabis Act, only industrial hemp or cannabis used for medical or scientific purposes may currently be imported into or exported from Canada. Any such import or export requires a public company. However,permit. In the future, we may seek permits to import or export cannabis and cannabis products. If we do not receive the required permits or receive licences with limitations that we do not expect, that our internal control over financial reporting or disclosure controlsability to import and proceduresexport cannabis and cannabis products could be materially adversely affected.
27
will prevent all errorsIf we expand outside of Canada, our ability to operate and remove all risk of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectivessell in foreign jurisdictions will be met. Furthermore, the design of a control system must reflect the fact that there are resource constraintsdependent on our ability to obtain and the benefits of such controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
In connectioncomply with the audit of our consolidated financial statements fornecessary regulatory licences and requirements. Additional government licences may be required in the fiscal periods ended December 31, 2019 and 2018, our management and independent auditors concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified included a lack of segregation of duties related to the review and approval of journal entries. It was noted that there is no review process in place to approve journal entries by someone other than the preparer. Similar material weaknesses were identified at Bridge Farm by the independent auditors thereof prior to our acquisition of Bridge Farm. We are currently implementing a remediation plan and taking the measures necessary to address the underlying causes of this material weaknesses and expect to remediate this material weaknesses for the fiscal year ending December 31, 2020. Remediation may take longer than we expect, the costs to be incurredfuture in connection with remediationour operations, in addition to other known and unknown permits and approvals which may be higher than we expect,required, including with respect to our Canadian and our efforts mayother foreign operations. To the extent such permits and approvals are required and not prove to be successful in remediating these material weaknesses.
If we fail to establish and maintain adequate internal controls, including by remediating the aforementioned material weaknesses, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information andobtained, we may not be able to comply with the applicable covenants inprevented from operating or expanding our financing arrangements. business.
As a result of any international expansion, we may become exposed to various levels of political, economic, legal, regulatory and other risks and uncertainties associated with operating in or exporting to foreign jurisdictions. These risks and uncertainties include changes in the laws, regulations and policies governing the production, sale, branding, marketing, and use of cannabis and cannabis-based products; political instability; currency controls; fluctuations in currency exchange rates and rates of inflation; price, export and import controls; land and water restrictions; government policies awarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction; changes in taxation laws, regulations and policies; restrictions
16
on foreign exchange and repatriation; changing political conditions and governmental regulations relating to foreign investment and the cannabis business more generally.
Failure to comply strictly with applicable laws, regulations and local practices could result in additional taxes, costs, civil or criminal fines or penalties or other expenses being levied on our international operations, as well as other potential adverse consequences such as the loss of necessary permits or governmental approvals or the inability to grow our business in these jurisdictions. Complying with the varying laws of the jurisdictions in which we may choose to expand can be subjecttime consuming, expensive and divert management attention from the rest of our business.
Risks Related to costly litigationRetail Operations Segment and shareholder actions,Franchise Operations
We face risks associated with our accessfranchise business model.
We receive a significant portion of our cannabis retail revenue in the form of franchise royalty payments. Failure to the capital markets may be limitedcollect payments due to us from our franchisees, due to their inability to make timely payments, dispute with us or adversely affected,otherwise, could have a material adverse effect on our results of operations and financial condition. Our franchisees operate franchised retail locations independently, and as such are subject to many factors beyond our control, all of which could adversely affect such franchisees’ ability to make timely royalty payments to us.
As a result, the success of our retail business and results of operations is significantly dependent upon the success of our franchisees' retail cannabis stores and their cooperation with us. Our franchisees' stores may be adversely affected by: declining economic conditions; increased competition in the retail cannabis market; changes in consumer preferences; demographic trends; changes in consumer sentiments towards the use of cannabis products; decreases in consumers’ discretionary income; consumers' willingness to accept product price increases; adverse weather conditions; our reputation, the strength of the Spiritleaf brand and the trading priceconsumer perception of our common sharesmarket position and offerings in terms of quality, price, value and service; consumers' experiences in our retail cannabis stores; and other risk factors related to operation of cannabis retail stores discussed in this Annual Report, to the extent they apply to such franchisees.
Our franchisees may decline. Additionally, ineffective internal controlsalso be susceptible to increases in certain key operating expenses that are either wholly or partially beyond our control, including: labour costs, including wages, workers' compensation, minimum wage requirements, health care and other benefits expenses; rent expenses and construction, remodeling, maintenance and other costs under leases; compliance costs as a result of changes in legal, regulatory or industry standards; energy, water and other utility costs; insurance costs; information technology and other logistical costs; and expenses associated with legal proceedings, if any.
Our success also relies on the willingness and ability of our independent franchisees to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, value/promotional and capital-intensive reinvestment plans. The ability of franchisees to contribute to the achievement of our plans is dependent in large part on the availability to them of funding at reasonable interest rates and may be negatively impacted by the financial markets in general, by their or our creditworthiness or by banks’ lending practices. If our franchisees are unwilling or unable to invest in major initiatives or are unable to obtain financing at commercially reasonable rates, or at all, our future growth and results of operations could expose usbe adversely affected.
In addition, franchise retail cannabis stores are subject to an increased riskvarious laws, regulations and guidelines relating to the management, packaging/labelling, advertising, sale, transportation, storage and disposal of fraudcannabis, and our franchisees may not comply with such laws, regulations and guidelines, which may adversely affect the franchisee’s ability to operate profitably, without incrementally onerous restrictions or misuse of corporate assetsat all, and subject uswhich may therefore limit the franchisee’s ability to potential delisting from the stock exchanges onmake timely and full payments to us. In addition, franchisees’ failure to comply, which we list or to other regulatory investigations and civil or criminal sanctions. Furthermore, we may be the subject of negative publicity focusingunable to prevent, may harm our brand, which could have a material adverse effect on the restatementreputation, profitability and operations of our previously issued financialentire corporate-owned and franchised cannabis retail network.
Our ownership mix also affects our results and related matters,financial condition. The decision to own or to operate under franchise agreements is driven by many factors whose interrelationship is complex. The benefits of a franchised structure depend on various factors including whether we have effectively selected franchisees, licensees and/or affiliates that meet our rigorous standards, whether we are able to successfully integrate them into our structure and may be adversely impacted by negative reactions fromwhether their performance and the resulting ownership mix supports our shareholders, creditors, or others with whom we do business. This negative publicity maybrand and financial objectives.
Our success in the cannabis retail market is dependent, in part, on our ability to attract and retain an adequate retail consumer base.
Our success in the cannabis retail market depends, in part, on our ability to attract and retain consumers and to establish an adequate consumer base. There are many factors which could impact our ability to attract and retain customers, employees and suppliers.
Pursuant to Section 404 (“SOX 404”) of the Sarbanes Oxley Act of 2002 (“SOX”), we will be required, beginning with the second annual report that we file with the SEC, to furnish a report by our management on our internal control over financial reporting, which, after we are no longer an emerging growth company, must be accompanied by an attestation report on such internal controls issued by our independent auditors. To achieve compliance with SOX 404 within the prescribed period, we will document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent auditors will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by SOX 404.
We recognized a goodwill impairment charge for the year ended December 31, 2019 and may be required to recognize additional goodwill and intangible asset impairment charges in the future.
In connection with the accounting for the Bridge Farm acquisition, we recorded goodwill and other intangible assets. Under IFRS, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets has been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Events or changes indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, slower growth rates in industry segments in which we participate and a decline in our stock price and market capitalization. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations and shareholders’ equity. For the year ended December 31, 2019, we recorded $100.3 million in non-cash charges for the impairment of goodwill for our acquisition of Bridge Farm based on an impairment in Bridge Farm’s ability to generate revenue from the cultivation, processing and distribution of CBD products as a result of significant delays and uncertainties in the licensing and regulatory requirements in the United Kingdom. The goodwill impairment was recognized in relation to the portion of goodwill assigned to Bridge Farm’s CBD business.
28
We may be subject to credit risk.
Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us. We have credit risk exposure based on the balance of our cash, accounts receivable, subscriptions receivable, and taxes recoverable. There are no assurances that our counterparties or customers will meet their contractual obligations to us.
Our financing agreements contain covenants that limit our ability to seek additional financing or perform desired business operations.
We have various loans, credit facilities and financing arrangements that impose certain covenants,retail consumers, including but not limited to the ability to continually source a sufficient selection of desirable products, the successful implementation of consumer-acquisition plans, the ability to profitably maintain price points attractive to consumers, the ability to secure leases and open retail stores in locations convenient to consumers, the ability to select a sufficient number of qualified franchisees and such franchisees’ ability effectively manage retail locations, and the continued growth in the aggregate number of consumers. The failure to acquire and retain consumers would have a material adverse effect on our business, operating results and financial condition.
17
We may lease unlicensed premises for potential cannabis retail stores with no guarantee of generating earnings.
We may enter into lease agreements for locations which are not subject to permit or licence to sell cannabis products at the time of entry into the lease. In the event we are unable to obtain applicable licences, permits and authorizations to sell cannabis products at such locations in compliance with applicable law, but are unable to terminate the lease or sub-lease the premises, we will be liable for payments on the lease, but may have no or limited revenues from which to make such payments, which could have a material adverse effect on our business, financial conditions and operating results.
Our retail business is dependent on the supply of cannabis products from third-party licensed producers.
Cannabis retailers are dependent on the supply of cannabis products from licensed producers. There can be no assurance that there will be a sufficient supply of cannabis of acceptable quality and at an acceptable price available to us to purchase in order to operate our cannabis retail business or satisfy all of consumers’ demand. Licensed producers’ growing operations are dependent on a number of key inputs and their related costs, including raw materials and supplies. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact licensed producers and, in turn, could have a material adverse effect on our business, results of operations and financial results. Any inability of licensed producers to provide us with sufficient supply of cannabis at acceptable prices as a result of factors that include, but are not limited to, the risks described in this Annual Report that are applicable to our cannabis operations, could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to find additional franchisees who meet our desired criteria, and even if we do, they may ultimately be unable to open franchise locations.
The opening of additional franchise retail cannabis stores depends, in part, upon the availability of prospective franchisees who meet our desired criteria. We may not be able to identify, recruit or contract with suitable franchisees in our target markets on a timely basis or at all. In addition, our potential franchisees may not ultimately be able to access or effectively utilize the financial or management resources that they need to open the stores contemplated by their agreements with us, they may elect to cease store development for personal or other reasons beyond our control, or they may ultimately not be permitted to open a store due to limits on the number of licences available for retail locations in a particular province or municipality or other regulatory or business reasons. If we are unable to recruit suitable franchisees or if franchisees are unable or unwilling to open new stores as planned, our growth may be slower than anticipated, or cease, which could materially adversely affect our ability to increase our revenue and materially adversely affect our business, financial condition and results of operations.
We face risks imposed by franchise regulation.
Our cannabis retail franchise business is subject, in part, to provincial franchise requirements, provincial laws regulating the offer and sale of franchises in Canada through the provision of franchise disclosure documents to potential franchisees containing certain exceptions, forbidding consolidation, amalgamationmandatory disclosures, and various provincial laws regulating the franchise relationship. There can be no assurance that we will maintain compliance with such laws at all times, and non-compliance could adversely impact our fundraising activities and thereby reduce anticipated royalty income, which in turn could materially adversely affect our business, financial condition and results of operations.
Certain provinces of Canada in which we have granted or merger,may grant franchises have franchise statutes and regulations. These franchise laws require a disclosure document or statement of a material change to be issued to prospective franchisees containing prescribed information. Failure to comply with these statutes can result in a prospective franchisee having the incurrenceright to rescind the associated franchise agreement, without penalty or obligation, for up to 60 days after receipt of the disclosure document, if the franchisor failed to provide the disclosure document or statement of material change within the time period prescribed or if the contents did not meet the requirements set out in the relevant legislation, or for a period of up to two years after entering into the associated franchise agreement if the franchisor failed to provide the disclosure document. In addition, if a franchisee suffers a loss because of a misrepresentation contained in the disclosure document or in a statement of a material change or as a result of the franchisor failing to comply with the disclosure requirements, a franchisee has a right of action for damages. These rights are in addition to any debt not specifically permitted,other rights a franchisee may have at law.
Risks Related to Our Cannabis Cultivation Operations
We are dependent upon a limited number of facilities that are integral to our cannabis cultivation and production business.
As of the amendmentdate of this Annual Report, all our cultivation and production activities are conducted at our Olds Facility and Rocky View Facility, and our licences issued under the Cannabis Act are specific to those facilities. Disruptions at, or adverse changes or developments affecting, our Olds Facility or Rocky View Facility, including municipal rezoning, facility design errors, environmental pollution, equipment or process failures, production errors, disease or infestation of our crops, fires, breakdowns of our sewage system, explosions, power failures, natural disasters or security failures, have had and could in the future have negative impacts on our production, the quality of our products, our reputation in the market and our financial results – any one of which could materially adversely impact our business. For example, a fire at our Olds Facility in December 2018 damaged a portion of our crops and caused some delays in our production cycle. In addition, any failure to comply with regulatory requirements under the Cannabis Act could result in the suspension or termination of our Health Canada licences and could have an adverse impact on our ability to renew such licences.
18
We currently rely on a limited number of suppliers for our extraction requirements.
Although we have recently commenced extraction activities at our facility at Olds, we currently depend, and may continue to depend on a limited number of suppliers for extracting THC and CBD for use in certain of our cannabis products. We cannot ensure that these suppliers will remain in business, have sufficient capacity or supply agreements,to meet our needs or that they will not be purchased by one of our competitors or another company that is not interested in continuing to work with us. Our use of single-source suppliers exposes us to several risks, including disruptions in supply, price increases or late deliveries. There are, in general, relatively few alternative sources of supply for substitute components. Our current vendors may be unable or unwilling to meet our future demands for our supply needs. Establishing additional or replacement suppliers for these components, materials and processes could take a substantial amount of time and it may be difficult to establish replacement suppliers who meet regulatory requirements. Any disruption in supply from any single-source supplier or service provider could lead to supply delays or interruptions, which would damage our business, financial condition, prospects and results of operations.
If we were to have to switch to a replacement supplier, the acquisitionmanufacture and delivery of our products could be interrupted for an extended period, which could adversely affect our business. Furthermore, although we are developing our own extraction capabilities, there is no guarantee that we will be successful in doing so or that we will have sufficient capacity to meet our supply needs. We may not be able to quickly establish additional or replacement suppliers for our extraction needs, if required. If we are able to find a replacement supplier, the replacement supplier would need to be licensed by Health Canada, which might require additional regulatory authority approval, which could result in further delay. Any interruption or delay in the supply of components or materials for our products or our inability to obtain components or materials from alternate sources at acceptable prices, or at all, in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.
Our reliance on these suppliers, service providers and manufacturers subjects us to a number of risks that could harm our reputation, business, financial condition, prospects and results of operations, including, among other things:
• | delays to the development timelines for our products; |
• | interruption of supply resulting from modifications to or discontinuation of a supplier’s operations; |
• | delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component; |
• | a lack of long-term supply arrangements for key components with our suppliers; |
• | inability to obtain adequate supply in a timely manner or to obtain adequate supply on commercially reasonable terms; |
• | difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner; |
• | production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; |
• | delay in delivery due to our suppliers prioritizing other customer orders over ours; |
• | damage to our reputation caused by defective components produced by our suppliers; and |
• | fluctuation in delivery by our suppliers due to changes in demand from us or their other customers. |
If any companyof these risks materialize, our costs could significantly increase and our ability to meet demand for our products could be impacted.
We are subject to risks inherent in an agricultural business, including the risk of crop failure.
The cultivation of cannabis is an agricultural process. As such, our business is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, fire, plant diseases and similar agricultural risks. Although we currently grow our products indoors under climate-controlled conditions, there can be no assurance that natural elements, such as extreme weather, insects and plant diseases, will not specifically permitted,partially or completely disrupt our production activities or have an adverse effect on our business. Cannabis plants can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. We have had to dispose of crops in the makingpast due to pathogens. Such instances often lead to reduced crop quality, stunted growth or death of any capital expenditurethe plant. Moreover, cannabis, including hemp, is “phytoremediative”, meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted. Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. In addition, we have experienced, and may in the future experience, production issues at our facilities, including poor crop yields, harvests of product with THC concentration that is too low to meet product specifications, fires, floods and contamination of our product from foreign objects. As a result of the foregoing, our products may not specifically permittedbe suitable for commercial sale or may be returned to us by our customers, and we may have to destroy the affected portions of our crops.
Natural disasters, unusual weather, pandemic outbreaks such as COVID-19, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results.
The occurrence of one or more natural disasters, such as hurricanes, floods and earthquakes, unusually adverse weather, pandemic outbreaks of influenza and other highly communicable diseases or viruses, such as the COVID-19 virus, boycotts and geo-political events, such as civil unrest in countries in which our operations are located and acts of terrorism, or similar disruptions could
19
adversely affect our business, financial condition, liquidity and results of operations. These events could result in physical damage to one or more of our properties, increases in fuel or other energy prices, the temporary or permanent closure of one or more of our facilities (production or retail) or our customers, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products from suppliers, the temporary disruption in the transport of goods, delay in the delivery of goods to and from our facilities, and the requirementdisruption to maintainour information systems.
In March 2020, as a result of the COVID-19 pandemic, Alberta declared a state of emergency and ordered the closure of schools and certain working capitalother public facilities. Alberta also amended its rules around paid sick leave to allow full and leverage ratios.part-time employees to take 14 days of job-protected leave if they are required to self-isolate or caring for a dependent that is required to self-isolate. In addition, we announced enhanced safety protocols at our Canadian facilities, staffing measure changes and implemented remote work procedures for its corporate staff. Such measures and government mandates may not be effective and one or more of our employees may get sick and may come to work infected, necessitating a short or long-term closure of the affected facilities, disrupting production. Such measures and mandates may also increase our expenses and otherwise impair our production levels or cause us to close or severely limit production at our facilities. Further, licensed cannabis retail stores in Canada may close voluntarily or be forced to close by the provincial governments, reducing our ability to distribute cannabis and otherwise potentially materially adversely affecting our business and results of operations. Consumer demand for cannabis and our other products may be reduced as a result of reductions in consumers’ disposable income associated with lay-offs and work or pay limitations due to mandatory social distancing and lockdown measures implemented by governments in the geographies where we operate. Production limitations, delays or stoppages, social distancing measures and other impediments affecting our suppliers, partners, producers of goods (such as vape hardware) and retail operations should they materialize, may make it difficult, more costly, or impossible for Sundial to produce or distribute cannabis, conduct quality testing, extract cannabis oils, or otherwise market and sell products. For example, so longwe have experienced delays in shipment of vape cartridge hardware for our products from China. Limitations on the function of Health Canada and other regulators as at least $75.0 million principala result of remote work of its employees or redeployment of its resources to addressing the pandemic may delay our communications with the regulatory authorities and delay renewal of our existing licences or the receipt of additional licences, permits and approvals required for our operations, should such licences, permits and approvals be sought. If macroeconomic conditions continue to worsen in Canada and the rest of the world, demand for cannabis and our other products may significantly decline and industry participants, including our customers and suppliers, may face financial hardship. In addition, the increased market volatility resulting from global business and economic disruption related to the pandemic and measures to contain it has made it more difficult for companies to access capital markets. Such volatility has hampered, and may in the future hamper, Sundial’s efforts to secure additional financing.
The future impact of the COVID-19 pandemic, including as a result of the introduction of more infectious or severe variants, on the Canadian cannabis market is uncertain. Even after the pandemic subsides, our businesses could also be negatively impacted should the effects of COVID-19 lead to changes in consumer behavior, including as a result of a decline in discretionary spending due to the adverse impact that the COVID-19 pandemic has had on the Canadian economy, financial markets and employment levels. During the past year, financial conditions for the cannabis industry have faced increased volatility. If such volatility continues, or there is a prolonged recession resulting from the COVID-19 pandemic, resulting in declines of cannabis purchases by consumers, our business, financial condition, results of operations and cash flows would be materially adversely affected.
Significant interruptions in our access to certain key inputs such as labor, raw materials, electricity, water and other utilities may impair our growing operations and materially affect our business.
Our production business is dependent on a number of key inputs and their related costs, including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Any significant interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production and may have a material adverse impact on our business and results of operations. While we believe we have met all milestones and have made application for all subsidies, there is no assurance that subsidies will continue or that our outstanding applications will be approved. In addition, our operations could be significantly affected by a prolonged power outage. Furthermore, our cultivation operations require a significant amount of loanselectricity as a result it may be difficult for us to locate areas to construct additional cultivation operations as we grow.
Our ability to compete and grow cannabis is outstanding underdependent on us having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that we will be successful in maintaining our required supply of labor, equipment, parts and components.
Our headquarters, Olds Facility and Rocky View Facility, are in Alberta, a province whose economy has historically relied heavily on the SAF Credit Agreement,oil and gas industry. During periods of strong oil and gas industry conditions, we may face increased competition for employees, which could harm our ability to attract and retain employees or increase our compensation costs.
Failure in our quality control systems may adversely impact our sales volume, market share and profitability.
The quality and safety of our products are critical to the success of our business and operations. As such, it is imperative that our (and our service providers’) quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by the design of the quality control systems, the quality training program, and adherence by employees to quality control guidelines, among other factors. Although we strive to ensure that we and all of our service providers have implemented and adhere to high caliber quality control systems, we or our service providers could experience a significant failure or deterioration of such quality
20
control systems. If, as a result of a failure in our (or our service providers’) quality control systems, contamination of, or damage to, our inventory or packaged products occurs, we may incur significant costs in replacing, destroying or repurposing such inventory, providing replacement products to our customers or recalling such products. We may be unable to meet customer demand and may lose customers who have to purchase alternative brands or products. In addition, consumers may lose confidence in our products whether affected or not and our brand may be materially damaged. A loss of sales volume from a contamination event may occur, and such a loss may affect our ability to supply our current customers and to recapture their business in the event they are forced to switch products or brands, even if on a temporary basis. We may also be subject to legal action as a result of a contamination, which could result in negative publicity and negatively impact our results of operations. During this time, our competitors may benefit from an increased market share that could be difficult and costly to regain.
We may not be able to store or transport our cannabis products to customers in a safe, timely and cost-efficient manner, and we may experience breaches of security at our facilities or loss as a result of theft of our products.
Because of the nature of our products and the limited legal channels for distribution, as well as the concentration of inventory in our facilities (including our licensed cannabis retail stores), we are subject to certain financial covenants, including certain leverage ratiosa heightened risk of theft of our product and covenants requiringother security breaches.
Canadian adult-use distribution rules take various forms on a jurisdiction-by-jurisdiction basis and often require us to (i) maintain at least 60%employ third parties to deliver our products to central government sites and from such sites to our cannabis retail stores. Any prolonged disruption of third-party transportation services could have a material adverse effect on our sales volumes or our end users’ satisfaction with our products. Rising costs associated with third-party transportation services used by us to ship our products may also adversely impact our profitability.
The security of our products during transportation to and from our facilities is of the square footageutmost concern. A breach of Bridge Farm’s existingsecurity at one of our facilities, or during transport or delivery, could result in the United Kingdom, representing approximately 900,000significant loss of product as well as customers and reputational damage and may expose us to additional liability, including regulatory fines, litigation or increased expenses relating to the resolution and future prevention of similar events. Any failure to take steps necessary to ensure the safekeeping of our cannabis could also have an impact on our ability to continue operating under our existing licences, to renew or receive amendments to our existing licences or to receive required new licences.
Risks Related to Our Liquor Retail Business
A decline in the consumption of alcoholic beverage products could materially adversely affect our business, financial condition and results of operations.
Our Company relies on consumers' demand for the alcoholic beverage products it sells in its Alcanna stores. Consumer preferences may shift due to a variety of factors, including changes in demographic or social trends, public health policies, and changes in leisure, dining and beverage consumption patterns. Even if overall liquor consumption does not decline, shifts in consumer preferences from alcoholic beverage products that are more profitable (for example, high-end wine or the Company's preferred label products) to those that are less profitable (for example, domestic beer), could materially adversely affect the Company’s business, financial condition, liquidity and results of operations.
A decline in consumption of alcohol generally or of one or more alcoholic beverage product categories could occur in the future due to a variety of factors, including:
• | a general decline in economic or geopolitical conditions and/or decline in discretionary consumer income; |
• | increased public concern about the health consequences of consuming alcoholic beverage products; |
• | a decline in the consumption of alcoholic beverage products in on-premise establishments, resulting in a decline in alcohol beverage products purchased by such establishments on a “cash and carry” basis; |
• | consumers favoring alcohol consumption at bars and restaurants instead of purchasing liquor for consumption at home; |
• | consumer dietary preferences favouring lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products; |
• | consumer shopping preferences favouring online shopping, resulting in less foot traffic in shopping centres where the Company's retail liquor stores are located; |
• | the increased activity of anti-alcohol consumption groups; |
• | a decline in the consumption of alcoholic beverage products as a result of consumers substituting legalized recreational cannabis or other similar products in lieu of alcoholic beverage products; |
• | increased federal, provincial and/or foreign excise or other taxes on alcoholic beverage products that increase product prices for the consumer and possible restrictions on alcoholic beverage advertising and marketing; |
• | increased regulation placing restrictions on the purchase or consumption of alcoholic beverage products or increasing prices due to the imposition of duties or excise tax or changes to international trade agreements or tariffs; |
21
• | inflation; and |
• | wars, pandemics (including COVID-19), weather and natural or man-made disasters. |
Changes in government regulations, in particular changes which decrease the cost of competition, could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company operates in the highly regulated retail liquor industry in the Provinces of Alberta and British Columbia. The business, operations or licensing of liquor stores may be adversely affected by: (i) new legislation, regulations, rules or bylaws; (ii) changes and court challenges to existing legislation, regulations, rules or bylaws; (iii) new interpretations of existing legislation, regulations, rules or bylaws; or (iv) decisions of the total 3.6 million square feetAGLC, the Liquor Control and Licensing Branch of expected capacity following the completionProvince of our planned expansionBritish Columbia (the "LCRB"), or other governmental authorities (including federal, provincial, municipal, or other local governments or agencies) or applicable courts. Such regulatory changes, interpretations or decisions could increase the cost of Bridge Farm’s facilities, dedicatedoperating the Company’s liquor retail business, limit the marketing, sales and other activities in which the Company is permitted to non-CBD plant productionengage, limit the number and inventory and (ii) achieve certain minimum gross margin targets in respecttypes of Bridge Farm’s non-CBD plant businessretail locations the Company can operate, or require the Company to cease operations altogether.
In addition to the foregoing, as a result of the Province of British Columbia's 2021 renewal of the moratorium on granting new liquor licences for the three months ending December 31,next ten years, new liquor stores cannot be opened in the province except pursuant to an existing license purchased from another liquor retailer. Growing the Company’s liquor retail network in the Province of British Columbia would, accordingly, require the purchase of existing licenses from other retailers, which may not be available on acceptable terms or at all, which may limit the Company’s ability to profitably expand in this market, resulting a material adverse effect on the Company’s business, financial condition, liquidity, results of operations and prospects.
The private retail distribution of alcoholic beverages in the Provinces of Alberta and British Columbia is both competitive and fragmented. Competition exists mainly on a local basis with the main competitive factors being location, convenience, price and service. Changes in the regulatory regime in a particular jurisdiction, for example to allow the licensing of more retail locations or reduce costs for new entrants in the industry, may increase competition that could materially adversely affect the Company’s business, financial condition, liquidity and results of operations.
In the Province of Alberta, the Company competes with local single store operators, other local and regional chain operators, and liquor stores associated with national and regional grocery store chains. The current regulatory regime in Alberta limits certain of the potential competitive advantages of large-scale retailers by, among other things, requiring liquor stores to be operated as a separate business, prohibiting the sale of liquor in stores selling other goods and by requiring all retailers to pay the same wholesale price and a uniform "postage stamp" delivery charge. Some municipalities have enacted zoning restrictions that limit the number of liquor store locations by establishing minimum distances of liquor stores to schools, religious establishments, playgrounds, and other areas. The Cities of Edmonton and Calgary have also enacted a "mature neighborhood overlay", requiring a minimum distance separation between two liquor stores of 500 meters (subject to certain "grandfathering" exceptions) in certain areas of the city. These zoning requirements limit the amount of competitors and competition in general in these municipalities and if they were to be relaxed or eliminated, this could adversely affect the Company’s business, financial condition, liquidity and results of operations.
In the Province of British Columbia, Alcanna competes with government owned and operated liquor stores, local independent stores and wine stores. A retail liquor store is not permitted to be relocated anywhere within 1.0 kilometers of an existing retail liquor store, or the site of an application to licence a new retail liquor store (subject to certain "grandfathering" exceptions). This arrangement limits the number of competitors who are able to enter into the market. Wine is permitted to be sold inside retail grocery stores in British Columbia as long as the grocery store obtains or owns a licence and complies with the current licensing requirements (including the 1.0 km separation requirements to another liquor store). Prior to July 8, 2019, only BC VQA wines were permitted to be sold; however, in order to comply with the United-States-Mexico-Canada Agreement, the Province of British Columbia now allows imported wine to be sold on grocery store shelves.
In addition, competition with new entrants in the liquor retail industry in the Province of British Columbia is reduced as a result of the above-described moratorium on granting new liquor retail licenses. Should such moratorium be lifted, competition in the British Columbian liquor retail industry could increase. If the moratorium remains and the three months ending March 31, 2020. OurCompany’s competitors are able to purchase existing liquor retail licenses on acceptable terms while the Company is not able to do so, the Company may face increased competition, lower market share or similar adverse competitive consequences, all of which could result in a material adverse effect on its business, financial condition, liquidity, results of operations and prospects.
Any future changes to the British Columbia or Alberta regulatory regimes may have a significant impact on the level of competition and the value of licences in such provinces, and therefore could materially adversely affect business, financial condition, liquidity and results of operations.
Unfavourable publicity or poor consumer perception of the Company’s liquor retail brands could have a material adverse effect on the Company’s business, financial condition and results of operations.
Success in the highly competitive retail liquor industry is dependent upon consumer perception of a number of factors, including the accessibility, affordability and safety of a company's retail liquor stores. The Company's reputation, and consequently its brands, may be negatively affected by various factors, several of which may be outside of the Company's control, including, but not limited to, the Company’s ability to maintain prices for its products despite any increases in costs, the required gross marginquality and safety of alcohol products supplied
22
to the Company and the success of the Company’s branding, marketing and advertising efforts. In addition, thefts and robberies of retail liquor stores in Alberta have become a publicized issue that may deter customers from shopping at the Company's stores. There can be no assurance that the Company's efforts to maintain the physical security and safety of its retail locations will be successful, or that future media attention or publicity regarding this issue, and other consumer perceptions, will be favourable to the Company's retail liquor business. Any unfavourable publicity or consumer perceptions could materially adversely affect the Company's business, financial condition, liquidity and results of operations.
If a significant number of the Company’s retail liquor licences were revoked or not renewed, or if the Company failed to secure new retail liquor licences, there could be a material adverse effect on its business, financial condition, liquidity and results of operations.
All of the Company’s Alberta liquor retail stores are operated pursuant to licences issued by the AGLC, which must be renewed annually. Similar to the process in Alberta, the Company’s liquor retail store in British Columbia is operated pursuant to a licence issued by the LCRB, which must be renewed annually. The AGLC and the LCRB have discretion in the granting or revocation of a licence to operate a liquor store. If a significant number of the Company's licences were revoked or not reissued, if their terms were modified in a manner materially adverse to the Company, or if new licences for any network expansion are not granted in a timely manner, on favorable terms or at all, it could materially adversely affect the Company's business, financial condition, liquidity and results of operations.
Delays or interruptions in the supply of liquor to the Company’s retail locations, or spoilage or shrinkage of the Company’s inventory, could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company is dependent upon a limited number of distributors for a substantial majority of its products. Specifically, liquor store operators in Alberta are dependent on the Connect Logistics Service warehouse and Brewers Distributor Ltd. for the substantial majority of their products. In British Columbia, liquor store operators are dependent on the British Columbia Liquor Distribution Branch (the "BCLDB") for the majority of their products. Any significant disruptions in the operations of these distributors, as a result of, for example, a labour disturbance, lack of product supply, pandemics or epidemics (including COVID-19), natural disasters or severe weather events, road or other transportation link closures, acts of crime, war or terrorism, or for any other reason, and a resulting interruption, delay or reduction in supply could materially adversely affect the Company’s business, financial condition, liquidity and results of operations.
In addition, once the Company’s supply enters its inventory, it may be subject to spoilage, breakage or shrinkage. Spoilage, breakage or shrinkage of inventory at levels materially greater than what the Company’s plans or budgets for could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.
Risks Related to our Markets and Industry
We intend to continue to focus primarily on the premium segment of the adult-use cannabis market, which may not be sustainable, or in which we may not be able to develop or maintain a brand that attracts or retains customers.
We focus primarily on users of cannabis in the Canadian adult-use cannabis market who are looking for premium products; however, such a market may not be sustainable. We may not be able to achieve or maintain attractive margins and our ability to achieve our near term or long-term business objectives would be materially adversely affected. Further, we may not be successful in creating and maintaining consumer perceptions of the value of our premium products. The promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to the place of sale and subject to prescribed conditions set out in the Cannabis Act and the Cannabis Regulations. Among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding and promotion that is appealing to minors. Such restrictions on advertising, marketing and the use of logos and brand names, and other restrictions on advertising imposed by Canadian federal or provincial laws or regulations, or similar regulations imposed in other jurisdictions, may prevent us from creating and maintaining consumer perceptions in the value of our premium products and establishing ourselves as premium producers. If we cannot successfully enter into or compete in the premium market, we may face significant challenges in gaining or maintaining a market share in Canada or in other cannabis markets in which we intend to operate, or we may be forced to sell our products at a lower price, which may materially adversely affect our results of operations.
Our success depends, in part, on our ability to attract and retain customers who in turn sell to ultimate consumers of cannabis and cannabis-related products. To do this, we are dependent upon, among other things, continually producing desirable and effective products and the continued growth in the aggregate number of adult-use cannabis consumers. We have made significant investments in enhancing our brand to attract consumers. Subject to the applicable legal restrictions, we expect to continue to make significant investments to promote our current products to new consumers and new products to current and new consumers. Such campaigns can be expensive and may not result in increased sales. If we are unable to attract new consumers or retain existing consumers and customers, we may not be able to increase our sales or sustain our business.
Our business model, including our ability to successfully target the premium segment of the adult-use cannabis market and maintain our brand, is also dependent on being able to grow at scale different strains of cannabis with consistent yields and THC-levels by strain. To the extent we are unable to do so, or we are unable to achieve desired THC-levels, our ability to achieve our near term or long-term business objectives would be materially adversely affected.
23
The legal cannabis market is a relatively new industry. As a result, the size of our target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.
Because the cannabis industry is in a nascent stage, there is a lack of information about the total addressable market as well as comparable companies available for potential investors to review in deciding about whether to invest in us. In addition, the development of the legal cannabis market is dependent on Health Canada and other regulators approving licences for retail stores and other distribution channels in a timely fashion. Any delays in such approvals or other regulatory developments may impact our market and price estimates, which may make it difficult to develop reliable expectations and assumptions. Accordingly, investors should rely on their own estimates regarding the potential size, economics and risks of the cannabis market in deciding whether to invest in our common shares. We have not generated net earnings since our inception and there can be no assurance that we will do so in the future. There can be no assurance that our growth estimates are accurate or that the cannabis market will be large enough for our business to be profitable or to grow as projected.
Although we are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets or products, if any, will be commercially viable or successfully produced and marketed. We must rely largely on our own market research to forecast sales and design products as detailed forecasts and consumer research are not generally obtainable from reliable third-party sources in Canada and in other international jurisdictions.
In addition, there is no assurance that the industry and market will continue to exist and grow as currently estimated or anticipated or function and evolve in the manner consistent with management’s expectations and assumptions. We could also be subject to other events or circumstances that that adversely affect the cannabis industry, such as the imposition of further restrictions on sales and marketing or further restrictions on sales in certain areas and markets.
The adult-use cannabis market in Canada has experienced, and may in the future experience, supply and demand fluctuations.
Following legalization, there was a shortfall in supply in the Canadian adult-use cannabis market leading to increased prices, increases in out-of-stocks and the consumers opting to buy cannabis on the illicit market. We and other licensed producers responded by increasing capacity. The increase in production combined with slower than expected retail store growth has resulted in over-supply in 2020, a trend that has continued into 2021. As inventory levels become greater than consumer demand, we have had to, and may in the future have to, engage in sale of excess inventory at discounted prices or offer promotional pricing to move older product, which could significantly impair operating results and our brand image. Conversely, if we underestimate demand for our products, we may experience inventory shortages, which might delay shipments to customers, reduce revenue, negatively impact customer relationships and diminish brand loyalty. For example, we have experienced shortages and out-of-stocks in our vape products due to supply constraints. In addition, demand for cannabis and cannabis products is dependent on a number of social, political and economic factors outsidethat are beyond our control, including knownthe novelty of legalization, which may wear off. A material decline in the economic conditions affecting consumers can cause a reduction in disposable income for the average consumer (as a result of the continuing impact of the COVID-19 pandemic or otherwise), change consumption patterns and unforeseen risks relatingresult in a reduction in spending on cannabis products or a switch to other products obtained through illicit channels. There can be no assurance that market demand for cannabis will continue to be sufficient to support our current or future production volumes and operating expenses. Management believeslevels or that we will be able to meetgenerate sufficient revenue to be profitable.
We may be unsuccessful in competing in the requirementoverall legal adult-use cannabis market in Canada.
Our Canadian adult-use business faces enhanced competition from others who are licensed under the Cannabis Act and the various provincial and territorial regulatory regimes to participate in the adult-use cannabis industry. The Cannabis Act and the various provincial and territorial legislation have established licensing regimes for the cultivation, production, processing, testing, packaging, labelling, delivery, transportation, distribution, sale, possession and disposal of this minimum gross margin covenant. However,cannabis for adult use.
Subject to certain restrictions set out in the Cannabis Act, adults are permitted to cultivate, propagate, harvest and distribute up to four cannabis plants per household. If a significant number of individuals take advantage of the ability to cultivate and use their own cannabis, our success in the adult-use business may be limited and may not fulfill our expectations.
As of April 1, 2022, approximately 838 licences were issued under the Cannabis Act by Health Canada. Certain of these competitors have longer operating histories and significantly greater financial, production, marketing, research and development and technical and human resources than we do. Some of these competitors have become public companies in the United States or Canada, giving them the ability to raise significant amount of capital quickly or use their publicly traded equity securities to conduct acquisitions. In addition, like us, many other competitors have established retail locations. As a result, our competitors may be able to bring more and better products to market more quickly than us. Our commercial opportunity in the adult-use market could be reduced or eliminated if our competitors produce and commercialize products for the adult-use market that, among other things, are safer, more effective, more convenient, better quality or less expensive than the products that we produce, have greater sales, marketing and distribution support than our products, enjoy enhanced timing of market introduction and perceived effectiveness advantages over our products and receive more favorable publicity than our products. If our adult-use cannabis products do not achieve an adequate level of acceptance by the adult-use cannabis market, or if our retail stores do not achieve and sustain adequate customer bases, we may not generate sufficient revenue from these operations, and our adult-use cannabis business may not become profitable. We expect that competition in the adult-use cannabis market will become more intense as current and future competitors begin to offer an increasing number of diversified products. As competition increases, we may experience additional downward price pressure on our cannabis products, loss
24
of market share and increased marketing costs. To remain competitive, we will require a continued high level of investment in marketing, sales and client support, and we may not have sufficient resources to maintain such efforts.
We also face competition from the illicit cannabis market. Illegal dispensaries and ‘black market’ operations and participants, despite not having a valid licence under the Cannabis Regulations, command a significant percentage of the total market for cannabis and cannabis products in Canada and may be able to (i) offer products with higher concentrations of active ingredients, including THC, than permitted by the Cannabis Act and Cannabis Regulations or offered in the legal market, (ii) use delivery methods, that licensed producers are prohibited from offering to individuals in Canada, (iii) brand products more explicitly, (iv) sell products at lower prices and (v) market and distribute products in ways not permissible by law. As these illicit market participants do not comply with the regulations governing the cannabis industry in Canada, their operations may also have significantly lower costs.
In addition, the legal landscape for medical and adult-use cannabis is changing internationally. An increasing number of jurisdictions globally are passing laws that allow for the production and distribution of medical or adult-use cannabis. Increased international competition, including competition from suppliers in other countries who may be able to produce at lower cost, and limitations placed on us by Canadian or other regulations, might lower the demand for our products on a global scale.
Consumer preferences may change, and we may be unsuccessful in acquiring or retaining consumers and keeping pace with changing market developments.
As a result of changing consumer preferences, many consumer products attain financial success for a limited period of time. Even if our products find success at retail, there can be no assurance that such products will continue to be profitable. Our success will be significantly dependent upon our ability to develop and carry new and improved product lines and adapt to consumer preferences. Even if we are successful in introducing new products or developing our current product offerings, a failure to gain consumer acceptance or to update products and our product offerings could cause a decline in our products’ or our retail stores’ popularity and impair our brand. In addition, we may be required to invest significant capital in the creation of new product lines, strains, brands, marketing campaigns, packaging and other product features — none of which are guaranteed to be successful. Failure to introduce new features and product lines and to achieve and sustain market acceptance could result in us being unable to satisfy consumer preferences and generate revenue.
The legal cannabis industry is in its early stages of development, and it is likely that we, and our competitors, will seek to introduce new products in the future. In attempting to keep pace with any new market developments, we may need to spend significant amounts of capital in order to successfully develop and generate revenues from new products we introduce. As well, we may be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. We may not be successful in developing effective and safe new products, anticipating shifts in social trends and consumer demands, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may have a material adverse effect on our business and results of operations.
In addition, the patterns of cannabis consumption in Canada may shift over time due to a variety of factors, including changes in demographics, social trends, public health polices and other leisure or consumption behaviors. If consumer preferences for our products or cannabis products move away from our products or cannabis products in general, or if we are unable to anticipate and respond effectively to shifts in consumer behaviors, we may be adversely affected.
We may not be successful in maintaining consumers’ brand recognition and loyalty to our products or retail stores.
Our continued success depends in part on our ability and our ability to continue to differentiate our brand names and maintain similarly high levels of recognition with target consumers.
Our ability to build and maintain brand recognition and loyalty is limited by current and potential future regulations that restrict our packaging, advertising and other branding efforts, making it more difficult to appeal to consumers or to leverage our brands. For example, the Canadian federal regulatory regime requires plain packaging on cannabis products and prohibits testimonials, lifestyle branding and packaging that is appealing to youth. These and similar limitations could have a material adverse impact on our business, financial condition and results of operations, as they make it more difficult to establish and retain brand recognition and customer loyalty.
Furthermore, even if we are able to continue to distinguish our products and retail stores, there can be no assurance that the sales, marketing, retail and distribution efforts of our competitors will not be successful in persuading consumers of our products and retail stores to switch to their products or retail stores. Some of our competitors have greater access to resources than we do, which better positions them to conduct market research in relation to branding strategies or costly marketing campaigns. Any loss of consumer brand recognition or loyalty to our products and offerings or our inability to effectively brand our products and offerings in a recognizable way, whether as a result of regulation or otherwise, will have a material effect on our ability to continue to sell products and maintain our market share, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
25
The vape market is a new market that is still evolving and is subject to significant uncertainty, including as a result of recent negative press and regulatory scrutiny of vape products in the United States.
We sell vape products in Canada. In Canada, vape products are regulated under the Cannabis Act and associated regulations, and such regulations were drafted prior to the recent reports of vaping-related deaths and illnesses in the United States. As a result, Health Canada or the individual provinces may amend or further review the rules governing vape products and restrict or prohibit sales of such products. For example, the AGLC delayed the legalization of vaping products in Alberta and, currently, vaping products are illegal in Quebec and Newfoundland. There can be no assurance that we will be able to do so.meet any additional compliance requirements or regulatory restrictions or remain competitive in the face of unexpected changes in market conditions.
There is a limited history and volume of research on the health effects of vaping, electronic cigarettes and other similar products. If the medical community were to determine that vaping or use of any of related products caused or posed a risk of long-term health risks, market demand for these products and their use could materially decline. Such a determination could expose us to litigation and result in increased regulation. Furthermore, vaping products sold on the illicit market that contain harmful chemicals or other ingredients may adversely impact the demand for such products in the legal market and create the perception that such products were dangerous. In addition, regulators may prohibit the eventsale of vaping products all together or severely restrict their use. A decline in the market demand for our vaping products, product liability claims, and increased regulation could have a material adverse effect on our business.
Risks Related to Our Products
There has been limited study on the health effects of cannabis and cannabis products, including vaping products, and future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the benefits, viability, safety, efficacy, dosing and social acceptance of such products.
Research in Canada, the United States and internationally regarding the benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids, such as CBD and THC, remains in relatively early stages. Few clinical trials on the benefits and risks of cannabis or isolated cannabinoids have been conducted.
Future research and clinical trials may draw opposing conclusions to statements contained in the articles, reports and studies currently favored, or could reach different or negative conclusions regarding the benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical or adult-use cannabis, which could adversely affect social acceptance of cannabis and the demand for our cannabis products.
Our products may be subject to recalls or returns for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of consumer goods products are sometimes subject to the recall or return of their products for a variety of reasons, including public health and public safety risks, product defects, such as contamination, adulteration, unintended harmful side effects or interactions with other substances, packaging safety, inadequate or inaccurate labelling disclosure or expiry. Although we dohave detailed procedures in place for testing our finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid product returns, recalls, regulatory action or lawsuits, whether frivolous or otherwise. While we have not meetbeen subject to a recall to date, if any of the required specified minimum gross marginproducts produced by us are recalled in the future due to an alleged product defect or for any other reason, we willcould be in defaultrequired to incur the unexpected expense of the SAF Credit Agreement,recall and any legal proceedings that might arise in connection with the recall. In addition, from time to time, we have had customers return our products alleging, among other things, contamination and failure to meet designated specifications as well as a result of the age of slow-moving product. As a result of any such recall or return, we may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall or return may require significant management attention, expose us to liabilities or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls and returns may lead to increased scrutiny of our operations by Health Canada or other regulatory agencies, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of such products, including products sold by us.
We may be subject to product liability claims or regulatory action if not cured priorour products are alleged to have caused significant loss, injury or death, which is exacerbated by the applicable deadline.fact that cannabis use may increase the risk of certain serious health conditions.
As a manufacturer and distributor of products which are ingested or otherwise consumed by humans, we face the risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused loss, injury or death. We may be subject to these types of claims due to allegations that our products or the products we have sold caused or contributed to injury, illness or death, made false, misleading or impermissible claims, failed to include adequate labelling and instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. This risk is exacerbated by the fact that cannabis use may increase the risk of developing schizophrenia and other psychoses, symptoms for individuals with bipolar disorder, and other side effects. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could also occur. In addition, the availabilitymanufacture, sale and distribution of incremental borrowings undercannabis products, like the manufacture, sale and distribution of any ingested or consumable product, involves a risk of injury to
26
consumers due to tampering by unauthorized third parties or product contamination. We may in the future have to recall certain of our current or future debt facilities are subject to conditions precedent, including the achievement of certain operating results. See “Liquidity and Capital Resources—Debt—Term Debt Facility” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
At December 31, 2019, the Syndicated Credit Agreement, as written, contained certain financial covenants to maintain:
|
|
|
|
|
|
|
|
At December 31, 2019 the Company was not in compliance with the interest coverage ratio covenant, which caused a cross-acceleration of its Term Debt Facility. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was appliedcannabis products as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimumresult of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020. In addition, we anticipate that we will not bepotential contamination and quality assurance concerns. A product liability claim or regulatory action against us could result in compliance with the covenants underincreased costs and could adversely affect our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020reputation and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialoguegoodwill with our lenders and have been able to obtain similar waivers in the past; however, there isconsumers. There can be no guaranteeassurance that we will be able to do somaintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future. See “Liquidityfuture on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and Capital Resources—Debt—Syndicated Credit Agreement”also could adversely affect our commercial arrangements with third parties.
Risks Related to Our Employees, Partners and Third Parties
We may seek to enter into extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships, or expand the scope of currently existing relationships, with third parties that we believe will have a beneficial impact on us, and there are risks that such strategic alliances or expansions of our currently existing relationships may not enhance our business in “Management’s Discussionthe desired manner.
We currently have, and Analysismay expand the scope of, Financial Condition and Results of Operations” attachedmay in the future enter into, extraction agreements, co-packing agreements, tolling services, joint ventures, licensing arrangements or other relationships with third parties that we believe will complement or augment our existing business and create additional revenue streams, including leasing any unused or excess facility space to this Annual Report as Exhibit 15.1.
Certain of these financingother licensed producers. Our ability to complete additional arrangements are securedis dependent upon, and may be limited by, among others,other things, the availability of suitable candidates and capital. In addition, such third-party arrangements could present unforeseen integration obstacles or costs, may not enhance our business and may involve risks that could adversely affect us, including the investment of significant amounts of management time that may be diverted from operations in order to pursue and complete such transactions or maintain such relationships. Future third-party arrangements could result in the incurrence of debt, costs and contingent liabilities, cross-contamination, damage to our products or facilities and harm to our brand, and there can be no assurance that future such arrangements will achieve, or that our existing arrangements will continue to achieve, the expected benefits to our business or that we will be able to consummate future arrangements on satisfactory terms, or at all.
Our contracts with other licensed producers may expose us to additional costs and negatively impact our results of operations.
We derive a portion of our revenue from sales of cannabis flower and trim to other licensed producers in Canada. Our supply contracts with these other licensed producers contain provisions governing, among other things, the quality and THC-content of the cannabis supplied and the manner, time and place of such delivery. We have in the past experienced issues with such supply agreements, including a legal dispute with one of our customers resulting from our failure to timely deliver product and the provision of additional product at no cost to another customer due to a disagreement over the THC content of product supplied. Issues with our contracts, including disagreements with our counterparties and any resulting publicity, and failure to comply with such agreements may have a material adverse impact on our results of operation and business. In addition, we are exposed to the credit risk of the licensed producers to which we sell. If any of our licensed producer-customers were to suffer financial difficulty, including bankruptcy, our business and liquidity may be materially adversely affected.
Directors and certain key employees of a licensed producer must obtain and maintain a security agreementsclearance from Health Canada. There is no assurance that any of our existing directors or employees who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one.
Each director and certain key employees of a company that holds a licence for cultivation, processing or sale under the Cannabis Regulations is subject to the requirement to obtain and maintain a security clearance from Health Canada. Certain additional key personnel are also required to obtain and maintain a security clearance. Under the Cannabis Regulations, a security clearance cannot be valid for more than five years and must be renewed before the expiry of a current security clearance. All of our directors and executive officers have obtained security clearance from Health Canada. There is no assurance that any of our existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations or loss of our licences. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance required by the Cannabis Act in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all. Furthermore, the Cannabis Regulations require us to designate a qualified individual in charge who is responsible for supervising transactions with cannabis, which individual must meet certain educational and security clearance requirements. Moreover, depending on the activity, under current regulations a qualified person in charge or an individual with security clearance must be physically present in a space where other individuals are conducting activities with cannabis. If our current designated qualified person in charge fails to maintain his security clearance, or if our current designated qualified person in charge leaves us and we are unable to find a suitable replacement who meets these requirements, we may no longer be able to conduct activities with respect to the cultivation, production or sale of cannabis.
27
We rely on third-party distributors to distribute our products, and those distributors may not perform their obligations.
We rely on third-party distributors, including provincial regulatory boards and private retailers to distribute our products, other than through our retail stores, and may in the future rely on other third parties, to distribute and sell our products to consumers. If these distributors do not successfully carry out their contractual duties, if there is a delay or interruption in the distribution of our products or if these third parties damage our products, it could negatively impact our revenue from product sales. Furthermore, any damage to our products, such as product spoilage, could expose us to potential product liability, damage our reputation and the reputation of our brands or otherwise harm our business and results of operations.
Third parties with whom we do business may perceive themselves as being exposed to reputational risk as a result of their relationship with us.
The parties with whom we do business, or would like to do business with, may perceive that they are exposed to reputational risk as a result of our business activities relating to cannabis, which could hinder our ability to establish or maintain business relationships or raise capital. These perceptions relating to the cannabis industry may interfere with our relationship with service providers in Canada and other countries.
Risks Related to Our Investments
We may make investments into equity or debt securities of other companies, or provide credit to other companies, and we may not obtain the anticipated level of return on such investments, or any return at all.
We have made in the past, and intend in the future, to make investments into the equity or debt securities of other companies, including by subscribing for such companies’ common shares, preferred shares, convertible debt or other securities. We may also provide revolving or non-revolving credit facilities or other types of loans to other companies.
Any such investment will be subject to liquidity, market value, credit, interest rate, reinvestment and certain other risks, which will be increased if we invest in securities or instruments which are not investment grade assets. The companies that we invested into in the past have had, and companies we may invest into in the future may have, poor financial performance, liquidity and results of operations and high levels of leverage. These risks may be further increased to the extent that we invest into companies that are distressed or bankrupt, or into new, small companies with limited operating histories. Liquidity risks will be especially high if we invest in companies that are not publicly traded, the shares of which would be subject to legal and other restrictions on resale and which would otherwise be less liquid than publicly traded securities.
Non-investment grade assets are considered speculative in nature and, if such assets represent debt securities or credit instruments, they may become a defaulted obligation for a variety of reasons. If such debt securities or credit instruments become subject to either substantial workout negotiations or restructuring, this may entail, among other things, a substantial reduction in the interest rate, a substantial write-down of principal, and a substantial change in the terms, conditions and covenants of such instruments. Such negotiations or restructuring may be quite extensive and protracted over time, which may detract the attention of our management from other matters and result in substantial uncertainty with respect to the ultimate recovery on the instrument. In the event of default, the liquidity of our investments may be limited, and to the extent that they are sold, it is highly unlikely that the proceeds from such sale will be equal to the amount of unpaid principal and interest thereon.
The fact that any debt securities or credit instruments may be secured does not guarantee that we will receive principal and interest payments according to their terms, or that we will be able to collect on such securities or instruments should we be forced to enforce our remedies. There is also a risk that the assets securing the securities or instruments may decrease in value over time, carry liabilities for which we may be responsible should we take possession of collateral, be impossible to transfer to us as a result of applicable laws and regulations (particularly in the case of cannabis-related assets), be difficult to appraise or liquidate and may fluctuate in value based upon the success of the borrowers’ business and market conditions, including as a result of the inability of such borrowers to raise additional capital or otherwise as a result of deterioration of its financial condition and prospects.
Credit we extend to other companies may contain provisions that allow loans we have made to be prepaid. In some cases, the prepayment of a loan may reduce our achievable yield if the capital returned cannot be invested in transactions with equal or greater expected yields, which could have a material adverse effect on our business, financial condition and results of operations.
If we invest in equity securities of other companies, such companies may never declare dividends, or may declare dividends in amounts insufficient to generate a return on our investment. As such, our only means to earn a return on our investment may be to sell the securities for a greater price than we paid for them, and there can be no assurance that we would be able to do so. The price of such securities may be volatile, and will be dependent on the business, financial position, results of operations and prospects of the company in which we invested, which would be beyond our control as we do not anticipate becoming a controlling shareholder in any such company, as well as factors beyond our control or the control of the company in which we invested, including, but not limited to, liens overperformance of the financial markets generally, investor perception of the company and its industry, and speculation about such company in the media, investor community or on the internet. The price of such securities will in all cases be subject to the risks similar to those facing our presentcommon shares and risks applicable to the business and securities of the company in which we may invest. Recent developments and volatility throughout the North American cannabis industry, including declines in prices of shares of cannabis companies, challenging access to capital, and mergers and acquisitions activity has in the past, and may in the future, assets. Events beyondadversely impact the value of our control,direct cannabis-related investments, as well as SunStream’s credit portfolio. In the event of
28
liquidation of a company in which we invested, any interest we have in the company’s equity will be subordinate to the interests of holders of debt and preferred shares of the company, if any, and as a result, we may lose our entire investment in the event of liquidation. If the company in whose equity securities we invest is private or ceases to trade on a stock exchange by virtue of de-listing following inability to comply with requirements of such stock exchange or otherwise, the liquidity of our investment in equity securities may become limited or cease to exist, causing the value of our investment to decline or be eliminated. All the foregoing could cause us to fail to realize the expected or any return on our investment in equity securities of another company.
If any of our investments provide for the payment of a royalty to us, then part of the value of our investment will be dependent on the ability of the company in which we invested to effectively maintain and grow sales of the products subject to such royalty. Such company’s ability to do so will be subject to the risks applicable to its business and there can be no assurance that such company will achieve the revenue targets required to trigger royalty payments in the near-term or at all. Should the company be unable to maintain or grow sales of its products, we may not be able to realize all or any anticipated revenues from any royalty arrangements.
Any investment we make will be subject to the risks applicable to the business, securities and operations of the company in which we invested, which, if such company is public, will be disclosed in the company’s filings with securities regulators in the applicable jurisdiction. You should read disclosure of any such risks in the company’s filings to assess the risk profile to which our investments may be subject.
In some circumstances, particularly in connection with investment in distressed or bankrupt companies, we may be required to bear certain extraordinary expenses, including legal, accounting, valuation and transaction expenses, in order to protect or recover our investments.
Any of the foregoing could cause us not to realize all or any of the anticipated benefits of our investments and may result in our taking an impairment charge related to such investments, which may materially adversely affect our financial position, results of operations and prospects. All of our investment decisions will be subject to our discretion, and you will not be able to influence investment decisions with which you might disagree.
Our joint venture interest in SunStream is subject to certain risks associated with the conduct of joint ventures.
Our joint venture interest in SunStream is subject to the risks normally associated with the conduct of joint ventures, including: (i) disagreement with SAF Group about the strategy, financing or operations of SunStream; (ii) that SAF Group may not comply with the underlying agreements governing the joint venture and may fail to meet its obligations thereunder; (iii) that SAF Group may at any time have economic or business interests or goals that are, or become, inconsistent with our interests or goals; (iv) the possibility that SAF Group may become insolvent; and (v) the possibility of litigation with SAF Group.
We may not realize all or any of the anticipated returns on our joint venture interest in SunStream, or any return at all.
SunStream is intended to leverage our strategic, financial and operational partnership with SAF Group to target asymmetrically enhanced risk-return opportunities in the cannabis industry to provide exposure to a portfolio of financial services and instruments. The profitability of SunStream, and, therefore, the return we realize on our investment in it, is dependent on SunStream’s ability to effectively execute its business strategy, which is subject to risks affecting its planned business, which include, but are not limited to: economic recessions or downturns and global economic, political and market conditions (including as a result of the COVID-19 pandemic and the Russia-Ukraine conflict); volatility, disruption and instability of the capital markets generally and the cannabis industry in particular; changes in general economicinterest rates; competition for business opportunities; the qualities of SunStream’s investment advisor’s investment expertise and the ability of such advisor to deploy its expertise in the financial services process and maintain referral and other relationships that generate business opportunities; regulations applicable to SunStream (and any adverse changes therein) and the regulations applicable to SunStream’s portfolio; and the ability of SunStream to generate returns on its business ventures, which include, but are not limited to, such other risks as are described under this section entitled “Item 3D—Risk Factors”.
Cannabis remains illegal under U.S. federal law. Strict enforcement of federal laws regarding cannabis would likely result in SunStream’s inability to execute its business plan, and may subject us to significant civil or criminal liability and other adverse consequences.
In the United States, despite cannabis having been legalized for medical use or adult use in a number of states, cannabis and cannabis products, other than hemp and certain hemp-derived products, such as CBD, continue to be categorized at the federal level as a Schedule I controlled substance under the CSA. The U.S. Supreme Court has ruled that the federal government has the authority to regulate and criminalize the sale, possession and use of cannabis, even for individual medical purposes, regardless of whether it is legal under state law. The U.S. government has not enforced the CSA or related federal laws related to cannabis against companies complying with state cannabis law and their vendors for over seven years, but there can be no assurance that this will continue. Accordingly, there can be no assurance that the portfolio companies to which SunStream provided financial services will not be prosecuted under the CSA or other federal laws for their cannabis-related activities. If SunStream’s portfolio companies were so prosecuted, it would have a material adverse effect on our business, financial condition and operations as a result of our interest in SunStream. There is also no assurance that third party service providers with whom we work could suspend or withdraw services due to SunStream’s involvement in the U.S. cannabis industry, which could have a material adverse effect on our business, financial condition and operations.
Moreover, individuals and entities may violate federal law if they aid and abet another in violating the CSA, or conspire with another to violate the law, and violating the CSA is a predicate for certain other crimes, including money laundering laws and the Racketeer
29
Influenced and Corrupt Organizations Act. To the extent that any of SunStream’s portfolio companies are found to violate the CSA, there can be no assurance that SunStream and/or Sundial would not be found to be in violation of the CSA, money laundering, racketeering or similar laws for financing such companies. If SunStream and/or Sundial are found to violate such laws, it could lead to arrests, criminal charges, forfeiture of property, significant fines and penalties, disgorgement of profits, administrative sanctions, criminal convictions and cessation of business activities, as well as civil liabilities arising from proceedings initiated by either the U.S. government or private citizens, all of which would materially adversely affect our business, financial condition, results of operations and reputation.
We may not realize all or any of the anticipated benefits of our investment in Zenabis.
On December 30, 2020, we completed an investment into Zenabis Investments Ltd. (“Zenabis”), a subsidiary of Zenabis Global Inc., whereby we acquired $58.9 million of aggregate principal amount of senior secured debt of Zenabis (the “Senior Loan”). The Senior Loan bears interest at a rate of 14% per annum and has a maturity date of March 31, 2025, with principal repayments due under certain circumstances over time. As of December 31, 2021, $51.9 million is outstanding under the Senior Loan. Due to the credit risk associated with Zenabis and its parent, and uncertainty of the completion of their proposed restructuring, the Company has adjusted the fair value of the Zenabis Senior Loan downward by $3.3 million in accordance with the requirements of IFRS. In the event that facts and circumstances change the fair value will be adjusted accordingly. The fair value determination does not attribute value to the associated royalty due to its inherent uncertainty, or monitoring fee.
The Senior Loan is subject to liquidity, market value, credit, interest rate, reinvestment and certain other risks, which is increased because the Senior Loan is a below investment grade asset. As a non-investment grade loan, the Senior Loan is considered speculative in nature and may become a defaulted obligation for a variety of reasons. On December 31, 2020, pursuant to the terms of the Senior Loan, we delivered a notice of default to Zenabis with respect to certain defaults not related to principal non-payment, which Zenabis is disputing. Should the Senior Loan become a defaulted obligation as a result of the foregoing notice of default or otherwise in the future, it may become subject to either substantial workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest rate, a substantial write-down of principal, and a substantial change in the terms, conditions and covenants of the Senior Loan. Such negotiations or restructuring may be quite extensive and protracted over time, which may detract the attention of our management from other matters and result in substantial uncertainty with respect to the ultimate recovery on the Senior Loan. In the event of default, the liquidity for the Senior Loan may be limited, and to the extent that it is sold, it is highly unlikely that the proceeds from such sale will be equal to the amount of unpaid principal and interest thereon.
The fact that the Senior Loan is secured does not guarantee that we will receive principal and interest payments according to its terms, or that we will be able to collect on the Senior Loan should we be forced to enforce our remedies. There is also a risk that the assets securing the Senior Loan may decrease in value over time, carry liabilities for which we may be responsible should we take possession of collateral, be difficult to appraise or liquidate and may fluctuate in value based upon the success of Zenabis’ business and market conditions, including as a result of the inability of Zenabis to raise additional capital or otherwise as a result of deterioration of its financial condition and prospects.
Furthermore, pursuant to the terms of the Senior Loan, Zenabis will, on a quarterly basis for 32 quarters, also pay us a royalty (the “Royalty”) based on quarterly sales revenue from its medical, recreational and wholesale cannabis lines, net of value added or sales taxes (“Net Cannabis Revenue”), at a rate that will vary from 2.0% to 3.5% based on the volume of such Net Cannabis Revenue in the quarter. The payment of the Royalty is subject to certain Net Cannabis Revenue targets and the maintenance by Zenabis of certain debt service ratios. If the Royalty is not payable in a given fiscal quarter because of failure to meet such targets, the term of the Royalty is extended for another quarter.
As a result, part of the value of our investment is dependent on Zenabis’ ability to effectively maintain and grow sales of the products subject to the Royalty. Zenabis’ ability to do so is subject to the risks applicable to its business and there can be no assurance that it will achieve the revenue targets required to trigger Royalty payments in the near-term or at all. Should Zenabis be unable to maintain or grow sales of its products, we may not be able to realize all or any anticipated revenues from the Royalty. In addition, Zenabis filed a petition with the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the Royalty. The court subsequently dismissed the petition and did not decide the merits of the case. Zenabis had 30 days from December 17, 2021 to file a notice of appeal in respect of the court’s findings, but they did not do so.
Any of the foregoing could cause us not to realize all or any of the anticipated benefits of our investment in Zenabis and may result in our taking an impairment charge related to such investment, which may materially adversely affect our financial position, results of operations and prospects.
We are subject to the risk of possibly becoming an investment company under the Investment Company Act of 1940.
To the extent we continue to make investments in the equity or debt securities of other companies, we run the risk of inadvertently becoming an “investment company” under Investment Company Act of 1940, as amended (the “Investment Company Act”), which may require us to register as an investment company under the Investment Company Act. Registered investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we operate our business, nor are registered investment companies permitted to have many of the relationships that we have with our affiliated companies.
30
To avoid becoming and registering as an investment company under the Investment Company Act, we operate as an ongoing enterprise, along with an asset base from which to pursue investments. Because we monitor the value of our investments and structure transactions accordingly, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions due to those concerns. In addition, adverse developments with respect to our ownership of certain of current or future investments, including significant appreciation or depreciation in the market value of certain publicly traded holdings, could result in our inadvertently becoming an investment company. If it were established that we were an investment company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company.
Risks Related to our Acquisitions
We may not be able to successfully identify and execute future acquisitions or dispositions or to successfully manage the impacts of such transactions on our operations.
We have in the past, and may in the future, seek strategic acquisitions. Our ability to identify and consummate any future potential acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary, our ability to observe or satisfy these covenants, which could resultobtain financing on satisfactory terms, if at all. Any such activities may require, among other things, various regulatory approvals, licences and permits and there is no guarantee that all required approvals, licences and permits will be obtained in a defaulttimely fashion or event of default under one or more of our financing arrangements. If an event of default under one or more of our financing arrangements occurs, the lender or lenders thereto could elect to declare all principal amounts outstanding at such time under such financing arrangements to be immediately due. An event of default under one of our financing arrangementsall. Acquisitions may also constitute a cross-default under one or more of our other financing arrangements, resulting in a default or event of default with respectexpose us to additional financing arrangements. In such an event, we may not have sufficient funds to repay amounts owing under such financing arrangementsrisks including: difficulties in integrating administrative, financial reporting, operational and we could loseinformation systems; difficulties in managing newly acquired operations and improving their operating efficiency; difficulties in maintaining uniform standards, controls, procedures and policies through all of our assets.
29
We are an emerging growth company and intend to take advantage of reduced disclosure requirements applicable to emerging growth companies, which could make our common shares less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal yearoperations; difficulties entering into markets in which we have total annual gross revenue of US$1.07 billionlittle or more; (ii) December 31, 2024 (the last dayno direct experience; difficulties in retaining key employees of the fiscal year ending afteracquired operations; and disruptions to our ongoing business. In addition, future acquisitions could result in the fifth anniversaryincurrence of additional debt, costs, and contingent liabilities. In the past, we have incurred substantial goodwill impairments related to prior acquisitions. We may also incur costs for and divert management attention to potential acquisitions that are never consummated. For acquisitions that are consummated, expected synergies may not materialize.
We face integration and liability risks in connection with our acquisition strategy, some of which may be unforeseen by us.
Our acquisitions are completed with the expectation that the successful completion of such acquisition will result in increased earnings and cost savings by taking advantage of operating and other synergies to be realized from the integration of the dateacquired entity. These anticipated benefits will depend in part on whether the acquired entity’s operations can be integrated in an efficient and effective manner. Management may face challenges incorporating the systems and personnel of an acquired entity, including possible unanticipated liabilities, unanticipated costs, the loss of key employees and commercial relationships, the need to revisit assumptions about future revenues, capital expenditures and operating costs, including synergies, and the need to address unanticipated liabilities. As a result of these factors, it is possible that the synergies expected from the combination of our business and that of an acquired entity will not be realized. In addition, integration efforts require substantial management attention and could detract attention from our day-to-day business.
Despite any diligence we may perform on an acquisition target, we may not fully appreciate, understand or fully anticipate the extent of the completionrisks associated with a target business and the acquisition and integration. Even if we have the benefit of indemnification provisions, escrow funds and/or insurance policies in connection with an acquisition agreement, our exercise of due diligence and risk mitigation strategies may not anticipate or mitigate the full risks of the acquisition and the associated costs. As a result of an acquisition, we will incur the liabilities of the target, including, but not limited to, matters related to litigation, regulation, the environment or otherwise, some or all of which may be unforeseen by us. We may not be able to contain or control the costs associated with unanticipated risks or liabilities, which could materially and adversely affect our IPO); (iii) the date onbusiness, liquidity, capital resources or results of operations.
The foregoing risks could be exacerbated, and new risks to our company, some or all of which we have issued more than US$1.0 billionmay be unable to foresee, may arise, if we acquire businesses engaged in non-convertible debt securities duringother business lines, such as alcohol retail, even if the prior three-year periodnew business lines are ancillary or (iv)related to our current business.
Risks Related to Our Jurisdiction of Incorporation
We are incorporated in the last dayProvince of Alberta and enforcement of actions may be difficult.
We are incorporated under the laws of the fiscal year during which we meetProvince of Alberta and our head office is located in the following conditions: (x) the worldwide market valueProvince of Alberta. All of our common equity securities held by non-affiliates as of our most recently completed second fiscal quarter is at least US$700 million, (y) we have been subject to U.S. public company reporting requirements for at least 12 monthsdirectors and (z) we have filed at least one annual report as a U.S. public company. For so long as we remain an emerging growth company, we are permitted toofficers and intend to rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
not being required to comply with the auditor attestation requirements of SOX 404;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);
being permitted to present only two years of audited financial statements in contrast to other reporting companies that must provide audited financial statements for three fiscal years;
reduced disclosure about executive compensation arrangements; and
exemptions from the requirements to obtain a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute arrangements not previously approved.
We may take advantage of some but not all, of the available exemptions described above. We have taken advantage of reduced reporting burdensexperts named in this Annual Report. We cannot predict whether investors will findReport are residents of Canada or otherwise reside outside of the United States, and a substantial portion of their assets and our common shares less attractive if we rely on these exemptions. If some investors find our common shares less attractive as a result, thereassets are located outside the United States. Consequently, it may be difficult for investors in the United States to bring an action against such directors, officers or experts or to enforce against those persons or us a less active trading market for our common shares and our share price may be more volatile.judgement obtained in a United States court predicated upon the civil liability provisions of U.S. federal securities laws or other laws of the United States.
31
We are a foreign private issuer and intend to take advantage of less frequent and detailed reporting obligations.
We are a “foreign private issuer”, as such term is defined in Rule 405 under the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the U.S. Exchange Act of 1934, as amended (the “Exchange Act”), we will beare subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we willare not required to file the same reports that a U.S. domestic issuer would file with the SEC, although we will beare required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.
As a foreign private issuer, we will beare exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements. We will also beare exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we will comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, we will have more time than U.S. domestic companies after the end of each fiscal year to file our annual report with the SEC and will not be required under the Exchange Act to file quarterly reports with the SEC.
In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We may in the future electhave elected to follow home countryCanadian practices in Canada with regard to certain corporate governance matters. As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all corporate governance requirements.
30
We may in the future lose our foreign private issuer status.
We may in the future lose our foreign private issuer status if a majority of our shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of either our directors or executive officers, considered as separate groups, are either U.S. citizens or residents; (ii) a majority of our assets are located in the United States; or (iii) our business is administered principally in the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If we are not a foreign private issuer, we would not be eligible to use foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on the Nasdaq that are available to foreign private issuers.
Tax The regulatory and accounting requirements may change in ways that are unforeseencompliance costs to us and we may face difficulty orunder U.S. securities laws as a U.S. domestic issuer will be unable to implement or comply with any such changes.significantly more than the costs incurred as a Canadian foreign private issuer.
General Risks
We are subjectmay not be able to numerous taxobtain adequate insurance coverage in respect of the risks we and accounting requirements, and changes in existing accounting or taxation rules or practices, or varying interpretations of current rules or practices, could have a significant adverse effect on our financial results, the manner in which we conduct our business face, the premiums for such insurance may not continue to be commercially justifiable or the marketability of any of our products. there may be coverage limitations and other exclusions which may result in such insurance not being sufficient to cover potential liabilities that we face.
We currently have international operationsinsurance coverage, including product liability, business interruption and planproperty insurance, protecting many, but not all, of our assets and operations. Our insurance coverage is subject to expand such operations incoverage limits and exclusions and may not be available for the future. These operations,risks and any expansion thereto, will require ushazards to comply with the tax laws and regulations of multiple jurisdictions, which may vary substantially. Complying with the tax laws of these jurisdictionswe are exposed. In addition, no assurance can be time consuminggiven that such insurance will be adequate to cover our liabilities, including potential litigation and expensive and could potentially subject us to penalties and feesproduct liability claims, or will be generally available in the future or, if available, that premiums will be commercially justifiable. If we were to fail to comply.
Fluctuationsincur substantial liability and such damages were not covered by insurance or were in foreign currency exchange rates could harm our resultsexcess of operations.
Wepolicy limits, we may be exposed to fluctuations of the Canadian dollar against certain other currencies because we publishmaterial uninsured liabilities that could impede our financial statements in Canadian dollars, while a portion of our assets, liabilities, revenues and costs areliquidity, profitability or will be denominated in other currencies, including the British pound sterling and euros. Exchange rates for currencies of the countries in which we intend to operate in the future, which currently include the United Kingdom and countries located within the Eurozone, may fluctuate in relation to the Canadian dollar, and such fluctuations may have a material adverse effect on our earnings or assets when translating foreign currency into Canadian dollars.solvency.
We may be subject to risks related to the protection and enforcement of our intellectual property rights, or intellectual property we licenselicence from others, and may become subject to allegations that we or our licensors are in violation of intellectual property rights of third parties.
The ownership, licensing and protection of trademarks and other intellectual property rights are significant aspects of our future success.
It is possible that we or Pathway Rx Inc. (“Pathway Rx”), as applicable, will not be able to make non-provisional applications, register, maintain registration for or enforce all of our intellectual property, including trademarks, in all key jurisdictions. The intellectual property registration process can be expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable intellectual property applications at a reasonable cost or in a timely manner or may obtain intellectual property registrations which are invalid. It is also possible that we will fail to identify patentable aspects of inventions made in the course of their development and commercialization activities before it is too late to obtain patent protection for them. Further, changes in either intellectual property laws or interpretation of intellectual property laws in Canada, and other countries may diminish the value of our intellectual property rights or narrow the scope of our intellectual property protection. As a result, our current or future intellectual property portfolio may not provide us with sufficient rights to protect our business, including our products, processes and brands.
32
Termination or limitation of the scope of any intellectual property licence may restrict or delay or eliminate our ability to develop and commercialize our products, which could adversely affect our business. We cannot guarantee that any third-party technology we licenselicence will not be unenforceable or licensed to our competitors or used by others. In the future, we may need to obtain licences, renew existing licence agreements in place at such time or otherwise replace existing technology. We are unable to predict whether these licence agreements can be obtained or renewed, or the technology can be replaced on acceptable terms, or at all.
Unauthorized parties may attempt to replicate or otherwise obtain and use our products, brands and technology. Policing the unauthorized use of our current or future trademarks, patents or other intellectual property rights could be difficult, expensive, time consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying the unauthorized use of intellectual property rights is difficult as we may be unable to effectively monitor and evaluate the products being distributed by our competitors, including parties such as unlicensed dispensaries and black marketblack-market participants, and the processes used to produce such
31
products. In addition, in any infringement proceeding, some or all of our trademarks or other intellectual property rights or other proprietary know-how, or those we licenselicence from others, or arrangements or agreements seeking to protect the same for our benefit, may be found invalid, unenforceable, anti-competitive or not infringed; may be interpreted narrowly; or could put existing intellectual property applications at risk of not being issued.
In addition, other parties may claim that our products, or those we licenselicence from others, infringe on their intellectual property, including their proprietary or patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources and legal fees, result in injunctions or temporary restraining orders or require the payment of damages. As well, we may need to obtain licences from third parties who allege that we have infringed on their lawful rights. Such licences may not be available on terms acceptable to us, or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licences or other rights with respect to intellectual property that we do not own. In the event that we licence our intellectual property to a third party, including a third partythird-party manufacturer, such third party could misappropriate our intellectual property or otherwise violate the terms of our licence. If any of the foregoing events were to occur, it could have a material adverse effect on our business, results of operations and financial condition.
We also rely on certain trade secrets, technical know-how and proprietary information that are not protected by patents to maintain our competitive position. Our trade secrets, technical know-how and proprietary information, which are not protected by patents, may become known to or be independently developed by competitors.
Research and development and clinical trials may be protracted and require substantial resources.
Clinical trials of cannabis-based medical products and treatments are novel and there is a limited or non-existant history of clinical trials relating to cannabis generally. Clinical trials relating to our current or future products are or will be, subject to extensive and rigorous review and regulation by numerous government authorities in Canada and in other countries where we intend to test our products and product candidates. The process of obtaining regulatory approvals for pre-clinical testing and clinical trials can take many months or years and require the expenditure of substantial resources. We are subject to the risk that a significant portion of these development efforts may not be successfully completed, required regulatory approvals may not be obtained, or our products are may not be commercially successful.
Ownership of our common shares may be considered unlawful in some jurisdictions and holders of our common shares may consequently be subject to liability in such jurisdictions.
Cannabis-related financial transactions, including investment in the securities of cannabis companies and receipt of any associated benefits, such as dividends, are currently subject to anti-money laundering and a variety of other laws that vary by jurisdiction, many of which are unsettled and still developing. While the interpretation of these laws are unclear, in some jurisdictions, such as the United Kingdom, financial benefit directly or indirectly arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of these laws, and persons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability underrisks related to our information technology systems, including the risk that we may be the subject of a cyberattack.
We have entered into agreements with third parties for hardware, software, telecommunications and other information technology (“IT”), services in connection with our operations. Our operations depend, in part, on how well we and our vendors protect networks, equipment, IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism or theft. Our operations also depend on the timely maintenance, upgrade and replacement of networks, equipment and IT systems and software, as well as preemptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays or increases in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such laws. Each prospective investor should therefore contact his, herfailure, adversely impact us.
We may be subject to cyber security risks or its own legal advisor regardingother breaches of IT security intended to obtain unauthorized access to our proprietary information or the ownershipinformation of our common sharescustomers and consumers, destroy data or disable, degrade, hold for ransom, or sabotage these systems through the introduction of computer viruses, fraudulent emails, cyber-attacks and other means, and such breaches could originate from a variety of sources including our own employees or unknown third parties. There can be no assurance that measures implemented to protect the integrity of these systems will provide adequate protection, and any related potential liability.such breach of our IT could go undetected for an extended period of time. A breach of our cyber security measures or the failure or malfunction of any of our computerized business systems, associated backup or data storage systems could cause us to suffer a disruption in one or more parts of our business and experience, including the shut-down of certain of our facilities or retail stores among other things, financial loss, a loss of business opportunities, misappropriation or unauthorized release of confidential or personal information, damage to our systems and those with whom we do business, violations of privacy and other laws, litigation, regulatory enforcement actions and penalties, indemnity obligations, remediation and restoration costs, increased costs to maintain our systems and other possible liabilities. Cyber-security breaches, ransomware attacks, or failures of our information technology systems could have a material adverse effect on our business operations, financial reporting, financial condition and results of operations, and result in reputational damage.
Risks Related to Our Common Shares
The price of our common shares in public markets has experienced and may in the future experience extreme volatility and you may lose some or all of your investment in our common shares as a result.
The price of our common shares has experienced significant fluctuations.volatility since the time of our listing on the Nasdaq Global Select Market, sometimes in the absence of a recent change in our financial condition or results of operations, such as our earnings, revenues, or other measure of company value, such that increases in our share price have at times been significantly inconsistent with improvement in the actual or expected indicators of the value of the Company.
33
The market price for our common shares has been and may in the future continue to be extremely volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following: (i) actual or anticipated fluctuations in our quarterly results of operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to us; (iv) the addition or departure of our executive officers and other key personnel; (v) the release or expiration of lock-up or other transfer restrictions on our common shares; (vi) sales or perceived sales, or expectation of future sales, of our common shares or instruments convertible or exercisable for our common shares; (vii) significant dispositions, acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; and (viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or target markets.markets; (ix) trading activity by investors which is not motivated by or commensurate with changes in the actual or expected indicators of the value of our Company; (x) speculation in the press, in the investment community, or on the internet, including on online forums and social media, about our Company, our industry or our securities; (xi) anticipated or pending investigations, proceedings, or litigation that involve or affect us, other companies in our industry, or other companies that investors deem comparable to us; and (xii) the occurrence of any other risk identified in the risk factors included in our filings with the Securities and Exchange Commission or the Canadian securities regulators.
Financial markets have experienced significant price and volume fluctuations which have affected the market prices of equity securities of public entities. Companies in the cannabis sector have also experienced extreme volatility in their trading prices. In many cases, these fluctuations, and the effect that they have on market prices, have been unrelated to the operating performance, underlying asset values or prospects of such entities. For example, certain companies, including ours, have recently experienced extreme volatility and increases in share price due to trading activity by retail investors which was motivated primarily by a desire to influence the financial performance of hedge funds, rather than changes in actual or expected value of the companies subject to trading activity. Accordingly, the market price of our common shares may decline rapidly and substantially even if our operating results or prospects have not changed.
Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed not to be temporary, which may result in impairment losses to us. Furthermore, certain investors may base their
32
investment decisions on considerations of our environmental, governance and social practices orof our industry as a whole, and our performance in these areas against such institutions’ respective investment guidelines and criteria. The failure to satisfy such criteria may result in limited or no investment in our common shares by those institutions, which could materially adversely affect the trading price of our common shares.
There can be no assurance that continuing fluctuations in the price and volume of equity securities will not occur and affect the trading price of our common shares.
Since we have never paid, and, for the foreseeable future, do not anticipate paying, dividends to holders of our common shares, your only means of receiving any return on an investment in our common shares may be to sell our shares for a price greater than that which you paid for them. Any of the foregoing risks may prevent you from doing so in the foreseeable future or at all, and you may lose some or all of your investment. In addition, while the daily trading volume in our common shares has recently been significant, there can be no assurance that such volume will not decline, perhaps rapidly and substantially, limiting your ability to sell our common shares and make a return on your investment on your desired timeline or at all.
The risk that you fail to resell our common shares at a price greater than you paid for them and lose some or all of your investment as a result will be further exacerbated if our shares experience a “short squeeze” and you purchase shares during a short squeeze.
Investors may purchase our common shares to hedge existing exposure in our common shares or to speculate on the price of our common shares. Speculation on the price of our common shares may involve long and short exposures. To the extent aggregate short exposure exceeds the number of our common shares available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common shares for delivery to lenders of such common shares. Those repurchases may, in turn, dramatically increase the price of our common shares until investors with short exposure are able to purchase additional common shares to cover their short position. This phenomenon is often referred to as a “short squeeze”. A short squeeze could lead to or exacerbate volatile price movements in our common shares that are not directly correlated to the performance or prospects of our Company. Once investors purchase the shares necessary to cover their short position, our share price will likely decline rapidly and substantially relative to its levels during the short squeeze, and may not return to levels at or above those during the short squeeze for a long time or at all. As a result, if you purchase our shares during a short squeeze, you will be at an increased risk of failing to sell our shares at a price greater than what you paid for them and losing some or all of your investment. While we currently have no reason to believe our shares would be the target of a short squeeze, there can be no assurance that we will not in the future be a target of a short squeeze, and you may lose a significant portion or all of your investment if you purchase our shares at a price that is significantly disconnected from the underlying value of our Company.
We may sell a substantial number of our common shares in the public market at any time. Such sales or the perception that they may occur could cause the market price of our common shares to drop significantly, even if our business is doing well.
We have in the past, and may in the future, sell a substantial number of our common shares, or securities convertible or exercisable into our common shares, in the public market at any time, without approval of existing shareholders, which we are not required to obtain under our articles of incorporation. Such sales, or the perception in the market that they may occur, could reduce the market price of our common shares rapidly and substantially. Accordingly, you may become unable to resell our shares at a price greater than
34
you paid for them for a long time or at all, and may lose some or all of your investment. The foregoing could also impair our ability to raise capital through the sale of additional equity securities.
Holders of our common shares may be subject to dilution resulting from future offerings of securities, the conversion or exercise, as applicable, of our outstanding warrants and the issuance of equity-based compensation by us.
We may raise additional funds in the future pursuant to a registration statement or otherwise, by issuing common shares, or securities exercisable or convertible into common shares, including preferred shares, warrants, rights or units comprising two or more of the foregoing securities. Holders of our common shares do not have preemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of securities is warranted, the price at which such issuance is effected and the other terms of any such future issuance. In addition, additional common shares may be issued by us in connection with the exercise of options and exchange of restricted share units (“RSUs”) and deferred share units (“DSUs”) granted by us or as part of an employee compensation plan or agreement, as well as in connection with warrants we previously issued to certain investors, which are subject to customary anti-dilution protections and certain other adjustments contained in such instruments. Such additional equity issuances have in the past, and could in the future, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our common shares.
If we fail to meet applicable listing requirements, Nasdaq (as defined below) may delist our common shares from trading, in which case the liquidity and market price of our common shares could decline.
Our common stock isshares are listed on the Nasdaq. In order to maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, a requirement that our closing bid price be at least US$1.00 per share. In March 2020,We were first notified by the priceListing Qualifications Department of one of our common shares fell below US$1.00. If our common shares were to trade below US$1.00 per share for 30 consecutive business days, we will receive a notification letter fromthe Nasdaq and will have 180 calendar days (subject to extension in some circumstances) to regain compliance with the minimum bid price rule. To regain compliance,that the closing bid price of our common shares must bedid not meet the minimum bid price of US$1.00 per share on May 12, 2020. Subsequent to this notification, we transferred our listing from the Nasdaq Global Select Market to the Nasdaq Capital Market in order to take advantage of an additional period of time to comply with the minimum bid price requirement, and regained compliance with the requirement on February 12, 2021.
On August 9, 2021, we were again notified by the Listing Qualifications Department of the Nasdaq that the closing bid price of our common shares for the last 30 consecutive business days from June 25, 2021 to August 6, 2021 did not meet the minimum bid price of US$1.00 per share as set forth in the minimum bid requirement. At that time, we had until February 7, 2022, to regain compliance with the minimum bid requirement. On February 8, 2022, we received a 180-day extension to regain compliance with the minimum bid requirement. As a result, we have until August 8, 2022 to regain compliance with the minimum bid requirement. If at any time prior to August 8, 2022, the closing bid price of our common stock is at least US$1.00 per share for a minimum of ten consecutive business days, (or such longer period of time aswe will be considered by Nasdaq to have regained compliance with the Nasdaq may require in some circumstances). minimum bid requirement. There can be no assurance that this will be the case.
If we fail to regain compliance with the minimum bid price rule or fail to maintain compliance with allany other applicable Nasdaq continued listing requirements, Nasdaq may determine to delist our common stock, at which time our common stock would be quoted on the over-the-counter markets. If we fail to comply with the applicable listing standards and Nasdaq delists our common shares, we and our shareholders could face significant material adverse consequences, including:
a limited availability of market quotations for our common shares;
• | a limited availability of market quotations for our common shares; |
reduced liquidity for our common shares;
• | reduced liquidity for our common shares; |
a determination that our common shares are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares;
• | a determination that our common shares are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares; |
a limited amount of news about us and analyst coverage of us;
• | a limited amount of news about us and analyst coverage of us; and |
defaults or breaches of covenants in our financing agreements; and
a decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future.
• | a decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future. |
We cannot assure you that we will be able to meetmaintain compliance with the continued listing standards of Nasdaq in the future.
Any equity securities we issue will be subordinate to our future indebtedness, if any, and any common shares we issue will be subordinate to any preferred shares we issue.
A significant portionCommon shares are equity interests in our Company and do not constitute indebtedness. As such, our common shares will rank junior to our future indebtedness, if any, and other non-equity claims on our Company with respect to assets available to satisfy claims on our Company, including in a liquidation of our total outstandingCompany. Additionally, our board of directors is authorized to issue series of preferred shares are restricted from immediate resale but may be sold intowithout any action on the market in the near future. This could cause the market pricepart of shareholders of our common shares. Holders of our common shares are subject to drop significantly, eventhe prior dividend, liquidation preferences, terms of redemption, conversion rights and voting rights, if any, of any holders of our business is doing well.preferred shares or depositary shares representing such preferred shares then outstanding.
Sales of a substantial numberOwnership of our common shares may be considered unlawful in some jurisdictions and holders of our common shares may consequently be subject to liability in such jurisdictions.
Cannabis-related financial transactions, including investment in the public market could occur atsecurities of cannabis companies and receipt of any time. Although a significant percentage of our outstanding shares of common stock remainassociated benefits, such as dividends, are currently subject to lock-up arrangements entered intoanti-money laundering and a variety of other laws that vary by jurisdiction, many
35
of which are unsettled and still developing. While the interpretations of these laws are unclear, in connection with our IPO (including voluntarily extensions by certain currentsome jurisdictions, financial benefit directly or indirectly arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of these laws, and former officers and directors), those lock-up arrangements will allow forpersons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability under such laws. Each prospective investor should therefore contact his, her or its own legal advisor regarding the release of significant portions of shares of common stock in the first, second and third quarters of 2020. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market priceownership of our common shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common shares.any related potential liability.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our share price and trading volume could decline.
The trading market for our common shares will depend,depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our shares could decrease, which might cause our share price and trading volume to decline.
33
Our articles permit us to issue an unlimited number of common shares without additional shareholder approval.
Our articles permit the issuance of an unlimited number of common shares, and shareholders will have no pre-emptive rights in connection with such further issuance. Additional issuances of our securities may involve the issuance of a significant number of common shares at prices less than the current market price for the common shares. Issuances of substantial numbers of common shares, or the perception that such issuances could occur, may adversely affect prevailing market prices of our common shares. Any transaction involving the issuance of previously authorized but unissued common shares, or securities convertible into common shares, would result in dilution, possibly substantial, to security holders.
Holders of our common shares may be subject to dilution resulting from future offerings of common shares and the issuance of equity-based compensation by us.
We may raise additional funds in the future by issuing equity securities. Holders of our common shares will have no preemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our shares is warranted, the price at which such issuance is effected and the other terms of any future issuance of shares. In addition, additional common shares may be issued by us in connection with the exercise of options granted by us or as part of an employee compensation plan or agreement. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our common shares.
As of December 31, 2019, there were 623,850 stock options, 9,816,800 simple warrants and 5,798,822 performance warrants outstanding, of which 22,500 stock options, 5,110,400 simple warrants, and 4,456,422 performance warrants, were vested and exercisable into an aggregate number of 9,589,322 common shares, at weighted average exercise prices of $3.12, $1.28 and $1.02, respectively. In addition, restricted and deferred share units of 416,807 were outstanding and are exchangeable for an equal number of common shares.
It is not anticipated that any dividends will be paid to holders of our common shares for the foreseeable future.
No dividends on our common shares have been paid to date. We anticipate that, for the foreseeable future, we will retain future earnings and other cash resources for the operation and development of our business. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our earnings, operating results, financial condition and current and anticipated cash needs. In addition, our ability to pay cash dividends on our common shares is limited by the terms of our financing arrangements. As a result, investors may not receive any return on an investment in our common shares unless they are able to sell their shares for a price greater than that which such investors paid for them.
Our by-laws, and certain Canadian legislation, contain provisions that may have the effect of delaying or preventing a change in control.
Certain provisions of our by-laws, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors may be willing to pay for our common shares. For instance, our by-laws contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings. A non-Canadian must file an application for review with the minister responsible for the Investment Canada Act (Canada) and obtain approval of the minister prior to acquiring control of a “Canadian business” within the meaning of the Investment Canada Act (Canada), where prescribed financial thresholds are exceeded. Furthermore, limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. Otherwise, there are no limitations either under the laws of Canada or Alberta, or in our articles on the rights of non-Canadians to hold or vote our common shares. Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.
Our by-laws provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to our internal affairs will be required to be litigated in Canada, which could limit investors’ ability to obtain a favorable judicial forum for disputes with us.
We have adopted a forum selection by-law that provides that, unless we consent in writing to the selection of an alternative forum, the Alberta Court of Queen’s Bench of the Province of Alberta, Canada and appellate Courts therefrom (or, failing such Court, any other “court” as defined in the ABCA, having jurisdiction, and the appellate Courts therefrom), will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf; (2) any action or proceeding asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us; (3) any action or proceeding asserting a claim arising pursuant to any provision of the ABCA or our restated articles or by-laws; or (4) any action or proceeding asserting a claim otherwise related to our “affairs” (as defined in the ABCA), provided that the by-law does not apply to any action brought to enforce any liability or duty
34
created by the Exchange Act or the Securities Act, including the respective rules and regulations promulgated thereunder, or any other claim under U.S. securities law for which the United States federal or state courts have exclusive jurisdiction. Our forum selection by-law also provides that our securityholders are deemed to have consented to personal jurisdiction in the Province of Alberta and to service of process on their counsel in any foreign action initiated in violation of our by-law. Therefore, it may not be possible for securityholders to litigate any action relating to the foregoing matters outside of the Province of Alberta.
Our forum selection by-law seeks to reduce litigation costs and increase outcome predictability by requiring derivative actions and other matters relating to our affairs to be litigated in a single forum. While forum selection clauses in corporate charters and by-laws
36
are becoming more commonplace for public companies in the United States and have been upheld by courts in certain states, they are untested in Canada. It is possible that the validity of our forum selection by-law could be challenged and that a court could rule that such by-law is inapplicable or unenforceable. If a court were to find our forum selection by-law inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected.
The regulated nature of our business may impede or discourage a takeover, which could reduce the market price of our common shares.
We require and hold various government licences to operate our business, which would not necessarily continue to apply to an acquiror of our business following a change of control. In addition, our directors, officers and certain other personnel are required to obtain, and maintain, security clearances from Health Canada. These licensing and security clearance requirements could impede a merger, amalgamation, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our common shares, which, under certain circumstances, could reduce the market price of our common shares.
WeThere is a significant risk that we may becomebe treated as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.
Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, there is a significant risk that we do not believe we aremay be treated as a passive foreign investment company (“PFIC”), for the most recent taxable year ending December 31, 2021, and we do not expectcan make no assurances in this regard with respect to become a PFIC in the current taxable year although there can be no assurance in this regard.or any future taxable years. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets, from time to time. Specifically, for any taxable year, we will be classified as a PFIC for U.S. federal income tax purposes if either: (i) 75% or more of our gross income in that taxable year is passive income, or (ii) the average percentage of our assets by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets is expected to be based, in part, on the quarterly market value of our shares, which is subject to change. See “Item 10E Taxation—Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.
If we are or were to become a PFIC, such characterization could result in adverse U.S. federal income tax consequences to U.S. investors. For example, if we are a PFIC, U.S. investors may become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure U.S. investors that we will not be a PFIC for the current taxable year or any future taxable year. U.S. Holders should consult their tax advisor concerning the U.S. federal income tax consequences of holding and disposing shares of a PFIC, including the possibility of making any election that may be available under the PFIC rules (including a mark-to-market election) which may mitigate the adverse U.S. federal income tax consequences of holding shares of a PFIC. See “Item 10E 10E—Taxation—Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.
Persons” for more information.
The agreements governingNew Warrants, the 2020 Series A Warrants and the New Investor Warrants have certain terms which may impede a takeover or similar transaction, which, under certain circumstances, could reduce the market price of our indebtedness contain covenants that reducecommon shares.
The outstanding warrants issued pursuant to a securities purchase agreement, dated June 5, 2020 (the “New Investor Warrants”), the Series A warrants issued in connection with a unit offering on August 18, 2020 (the “2020 Series A Warrants”) and the warrants issued pursuant to the warrant exercise agreement dated February 19, 2021 (the “New Warrants”) prohibit us from engaging in Fundamental Transactions (as defined in such instruments), including specified transactions related to Change of Control (as defined in such instruments), unless the successor entity assumes all of our financial flexibilityobligations under such instruments under a written agreement in form and substance satisfactory to, and approved by, the holder thereof. These restrictions could impede a merger, amalgamation, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our ability to operate.
The agreements governing our indebtedness each impose significant operating and financial restrictions on us. These restrictions will limit our and our subsidiaries’ ability to, among other things:
• incur or guarantee additional debt or issue disqualified stock or preferred stock;
• pay dividends and make other distributions on, or redeem or repurchase, capital stock;
• makecommon shares, which, under certain investments;
• incur certain liens;
35
• enter into transactions with affiliates;
• merge or consolidate; and
• transfer or sell assets.
In addition, such agreements subject us and our subsidiaries to covenants, representations and warranties, and our Syndicated Credit Agreement and our Term Debt Facility, each as amended, include various financial and other maintenance covenants. Seecircumstances, could reduce the section entitled “Selected Annual Information—Debt” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility, which was cross-accelerated, was classified as a current liability on the Company’s balance sheet. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.
In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the termsmarket price of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar amendments in the past; however, there is no guarantee that we will be able to do so in the future.common shares.
As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to fund our operations, compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants.
Our failure to comply with the restrictive covenants described above as well as the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision.
Furthermore, if we were unable to repay the amounts due and payable under the Syndicated Credit Agreement and our Term Debt Facility, those lenders could proceed against the collateral securing such indebtedness. In the event our lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness or if we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.
3637
Item 4. InformationInformation on the Company
A. | History and development of the company. |
Sundial was incorporated under the Business Corporations Act (Alberta) (the “ABCA”) on August 19, 2006. On July 22, 2019, we filed articles of amendment to effect a 1 to 1.6 share split. We have 14eight direct and indirect subsidiaries, all of which are wholly-owned, and a 50% interest in Pathway Rx.wholly-owned. On August 1, 2019, our common shares commenced trading on the Nasdaq under the symbol “SNDL”.
Our headquarters, principal executive and registered offices are located at #200,#300, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3. Our phone number is +1 (403) 948-5227. Our website is www.sndlgroup.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Annual Report, and the inclusion of our website address in this Annual Report is only for reference.
We are subject to the informational requirements of the Exchange Act and are required to file reports and other information with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
Over the three most recently completed fiscal years and for the current fiscal year, we have undertaken and/or completed a business disposition, several business acquisitions and capital expenditures, including, among others, the following:
Business dispositions
Business acquisitions
Bridge Farm
On July 2,February 22, 2019, the Company, through its wholly owned subsidiary, Sundial UK Limited, acquiredsigned a Sale and Purchase Agreement to acquire all the issued and outstanding shares of Project Seed Topco Limited (“Bridge(together with its subsidiaries, “Bridge Farm”) a private company located in the United Kingdom of Great Britain and Northern Ireland (“UK”). The acquisition closed on July 2, 2019. Bridge Farm was acquired to expand the Company’s business to cannabidiol (“CBD”)CBD extraction and production, with the intent to sell CBD products in the UK, subject to certain regulatory, licensing and other restrictions. The acquisition consideration was comprised of:
Cash considerationrestrictions, to launch CBD sales in the amount of £45.0 million;
The issuance of 2.4 million common shares valued at $37.2 million based on the fair value of a common share of the Company on the closing date and contingent consideration of $8.4 million representing the value of incremental shares potentially issuable on the one year anniversary of the closing date; and
Contingent consideration valued at $7.2 million representing the fair value of earn-out payments ranging from nil to a maximum of an additional 1.6 million common shares of the Company based on a prescribed formula.
United Kingdom. At December 31, 2019, the Company recorded a goodwill impairment of $100.3 million based on significant delays and uncertainties in the CBD licensing and regulatory framework in the UK.United Kingdom. As part of the negotiations with the Company’s senior lenders regarding a December 31, 2019 covenant breach and restructuring of its credit agreements, the Company was required to enter into a definitive sale and purchase agreement related to the sale of Bridge Farm.
On May 15, 2020, the Company entered into an agreement to sell all of the outstanding shares of Bridge Farm to a company affiliated with the former management sellers that were parties to the original acquisition (the “Bridge Farm Purchaser”) in exchange for (i) the assumption by the Bridge Farm Purchaser of $45 million of the total $115 million principal amount outstanding under the secured credit agreement (the “Term Debt Facility”) (thereby reducing the Company’s obligations thereunder to $70 million), (ii) the assumption by the Bridge Farm Purchaser of contingent consideration liabilities related to the additional share obligation and remaining earn out obligation under the original Bridge Farm acquisition agreement dated July 2, 2019, and (iii) the cancellation of approximately 2.7 million Sundial common shares (value of $3.0 million), representing all of the shares currently held by the management sellers of Bridge Farm issued in connection with the original acquisition of Bridge Farm by the Company in 2019 (collectively, the “Bridge Farm Disposition”). The sale of Bridge Farm closed on June 5, 2020.
The Bridge Farm operations comprised the Company’s entire Ornamental Flower segment located in the United Kingdom. The Ornamental Flower segment was not previously classified as held-for-sale or as a discontinued operation as it was not highly probable that the carrying amount of the disposal group would be recovered through a sale transaction rather than through continuing use. The comparative statement of loss and comprehensive loss and statement of cash flows has been re-presented to show the discontinued operation separately from continuing operations. With the disposition of the Ornamental Flower segment, the Company no longer has multiple segments. Accordingly, the Cannabis operations in Canada comprise the entire operations of the Company.
Pathway Rx
On March 23, 2021, the Company’s equity interest in its subsidiary, Pathway, decreased from 50% to 25%, resulting in a loss of control. The Company decreased its equity interest in connection with amending the licence agreement that provides for use of Pathway’s intellectual property. The licence agreement was amended to terminate the quarterly fixed payments.
Business acquisitions
Pathway Rx
On March 13, 2019, the Company signed a share purchase agreement with Darryl Hudson, Olga Kovalchuk and Igor Kovalchuk, who iswas our non-executive employee, to acquire 50% of the issued and outstanding shares of Pathway Rx in consideration for an aggregate of 296,800 of our common shares. The Company subsequently reduced its interest in Pathway Rx as discussed above under “—Business Dispositions.”
38
Concurrently with the acquisition of our interest in Pathway Rx, we entered into a licenselicence agreement (the “Pathway Rx LicenseLicence Agreement”), which granted us an exclusive right to use Pathway Rx’s intellectual property in exchange for:
a royalty of 3% of gross revenues derived from activities which use the intellectual property that is the subject matter of the license agreement (the “Pathway Royalty Activities”), which royalty percentage is increased to 5% of gross revenues derived from Pathway Royalty Activities upon the achievement of certain gross revenue milestones in one calendar year;
the grant of up to 280,000 of warrants to purchase our common shares at an exercise price of $1.81 per share, subject to achievement of certain milestone gross revenues derived from the Pathway Royalty Activities;
50% of net revenues received by the Company from the sale of certain of the licensed products or the use of certain of the licensed intellectual property; and
37
• | the grant of up to 280,000 of warrants to purchase our common shares at an exercise price of $1.81 per share, subject to achievement of certain milestone gross revenues derived from the Pathway Royalty Activities; |
• | 50% of net revenues received by the Company from the sale of certain of the licensed products or the use of certain of the licensed intellectual property; and |
• | a fixed payment of $1.4 million, payable in quarterly installments of $87,500 over the first four years of the term of the Pathway Rx |
The initial term of the Pathway Rx LicenseLicence Agreement is ten years, and it is automatically renewable for consecutive one year terms unless we notify Pathway Rx of the intention not to renew the agreement at least 30 days prior to the expiration of the initial term or the applicable renewal term.
On May 5, 2021, the Company and Inner Spirit Holdings Ltd. (“Inner Spirit”) announced that they had entered into an arrangement agreement pursuant to which the Company acquired all of the issued and outstanding common shares of Inner Spirit (the “Inner Spirit Transaction”). The Inner Spirit Transaction closed on July 20, 2021.
The Inner Spirit Transaction consideration was comprised of:
(i) | an aggregate $92.6 million cash ($0.30 in cash for each Inner Spirit common share); |
(ii) | an aggregate 24.4 million Sundial common shares valued at $26.2 million based on the fair value of each common share of the Company on the closing date (0.0835 of a Sundial common share for each Inner Spirit common share); and |
(iii) | contingent consideration valued at $1.2 million representing the fair value of Inner Spirit warrants. |
The acquisition of Inner Spirit has led to the establishment of a retail operations segment that comprises the sale of recreational cannabis through wholly owned and franchise retail cannabis stores. Inner Spirit is a retailer and franchisor of Spiritleaf recreational cannabis stores across Canada, with a network that includes more than 100 franchised and corporate-owned locations.
Alcanna
On October 7, 2021, the Company announced that it had entered into an arrangement agreement with Alcanna Inc. (“Alcanna”) pursuant to which the Company will acquire all of the issued and outstanding common shares of Alcanna by way of a statutory plan of arrangement (the “Alcanna Transaction”). The Company and Alcanna amended the arrangement agreement in respect of the Alcanna Transaction on January 6, 2022, and the Alcanna Transaction closed on March 31, 2022. Alcanna is a Canadian liquor retailer, operating predominantly in Alberta under its three retail brands, “Wine and Beyond”, “Liquor Depot” and “Ace Liquor”. Alcanna holds an approximately 63% equity interest in Nova Cannabis Inc. (“Nova”), a Canadian cannabis retailer operating stores across Alberta, Saskatchewan and Ontario.
The Alcanna Transaction consideration was comprised of (i) an aggregate $54.3 million cash ($1.50 in cash for each Alcanna common share), and (ii) an aggregate 320.6 million Sundial common shares valued at $280.4 million based on the fair value of each common share of the Company on the closing date (8.85 of a Sundial common share for each Alcanna common share).
Due to the proximity of the closing of the Alcanna Transaction and the date of issuance of the consolidated financial statements, the Company has not prepared the acquisition date fair value of the total consideration transferred or the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed.
Capital expenditures
Olds Facility
Capital expenditures in 2021 totaled $1.4 million and mainly related to infrastructure.
Capital expenditures in 2020 totaled $2.3 million and mainly related to buildings and infrastructure. The Olds Facility is complete and fully licensed for cannabis cultivation, processing and sale by Health Canada. In addition, the Company completed and operates a 20,000 square foot processing facility.
Capital expenditures in 2019 totaled $138.1 million of which $98.8 million was spent continuing the construction and expansion of our flagship facility in Olds, Alberta. Furthermore, the Company has commenced construction of an extraction and processing facility, estimated to be approximately 20,000 square feet at our Olds facility. The full build out of the Olds facility is expected to cost approximately $190 million, of which approximately $5 to $10 million remains to be invested.
39
Capital expenditures of $76.3 million during the ten months ended December 31, 2018 and $7.6 million during the year ended February 28, 2018 were primarily related to the construction and development of our Olds Facility, which commenced in July 2017. Remaining capital spending was directed toward renovations and upgrades to our Rocky View facility along with the purchase of land and equipment to support construction and expansion efforts.
Merritt Facility
Construction of our facility in Merritt, facilityBritish Columbia (the “Merritt Facility”) began in March 2019 with capital spending totaling approximately $10 million in 2019; however, construction of the Merritt facility has been temporarily deferredsuspended pending increases in market demand and availability of appropriate financing.demand. The Merritt facility, if constructed and licensed, willFacility was intended to serve as the primary production facility of our the Company’s BC Weed Co. brand. Management is committed to a plan to sell the Merritt Facility and the asset is available for immediate sale, resulting in the reclassification to assets held for sale on the consolidated statement of financial position.
Capital expenditures in 2020 were a recovery of $1.2 million relating to refunds of provincial hydro and utility deposits.
There were no capital expenditures with respect to the Merritt Facility in 2021.
The amount of remaining capital expenditures at the Merritt facilityFacility will vary depending on the scale of the facility that will be constructed. A mini-pod is expected to cost $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete.
Clay Lake Facilities
Following the acquisition of Bridge Farm on July 2, 2019, we incurred $27.8 million of capital expenditures primarily related to the construction and development of the second phase of the facility in Clay Lake, UK (the “Clay Lake Phase 2 Facility”).
Capital expenditures in 2020 totaled $4.4 million mainly related to the construction and development of the Clay Lake Phase 2 facility. We expectFacility, prior to spend an additional $10 million to complete the development ofdisposition.
The entire facility in Clay Lake, Phase 2 facility resulting in a total costUK, was disposed of approximately $42 million. We expect to complete construction inas part of the second quarter of 2020.
Bridge Farm Disposition (see “Business dispositions—Bridge Farm” above).
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed herewith as Exhibit 15.1 for information about significant financing transactions.
38
Our Company
The principal activities of the Company are (i) the production, distribution and sale of cannabis in Canada pursuant to the Cannabis Act, which regulates the production, distribution, and possession of cannabis for medical and adult recreational access in Canada, (ii) the operation and support of corporate owned and franchised retail cannabis stores in Canadian jurisdictions where the private sale of recreational cannabis is permitted and (iii) the deployment of capital to investment opportunities in the global cannabis industry.
The Company’s reportable segments are organized by business line and are comprised of three reportable segments: cannabis operations, retail operations and investments. Cannabis operations include the cultivation, distribution and sale of cannabis for the adult-use market and medical markets in Canada. Retail operations include the private sale of recreational cannabis through corporate-owned and franchised retail cannabis stores. Investments include the deployment of capital to investment opportunities in the global cannabis industry. Certain overhead expenses not directly attributable to any reportable segment are reported as “Corporate”.
Sundial is a licensed producer that grows cannabis using state-of-the-art indoor facilities.
Sundial’s Canadianfacilities with retail operations cultivate cannabis using an individualized “room” approach, in approximately 470,000 square feetfocused on the retail sale of total space. In the United Kingdom, the Company grows traceable plants, including hemp, ornamental flowers and edible herbs in approximately 1.75 million square feet of environmentally friendly facilities. Sundial is headquartered in Calgary, Alberta, with operations in Olds, Alberta, and Rocky View County, Alberta.
In Canada, Sundial currently produces and markets cannabis products forand accessories, and investments targeting the adult-use market. Sundial’s purpose-built indoor modular grow rooms create consistent, highly controlled cultivation environments and are the foundation of the Company’s production of high-quality, strain-specificglobal cannabis products. The Company has established supply agreements with or has been approved to supply cannabis directly to retailers in nine Canadian provinces, with approval recently received from Quebec. Once supply agreement with Quebec is finalized, Sundial’s distribution network will cover 98% of the national recreational industry.
The Company’s primary focus has been on producing and distributing premium inhalable products and brands (flower, pre-rolls and vapes). On October 24, 2019, the Company received a licence from Health Canada to sell cannabis oil products and began the sale and distribution of cannabis vape products in December 2019. The Company plans to expand to edibles, extracts, topicals and other products which became legally permitted in the fourth quarter of 2019.
The Company is currently marketing its adult-use products under its Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value) brands and intends to introduce new products under these brands as it expands its brand portfolio.
The Company also continues to enter into agreements to supply other licensed producers in Canada. Although in 2019 most of the Company’s sales were to other licensed producers, the Company expects these sales to decrease as a percentage of total sales going forward assuming retail market capacity in Canada expands.
In July 2019, the Company acquired Bridge Farm, a grower of ornamental plants and herbs, based in the United Kingdom, with the intention of converting Bridge Farm’s existing facilities to the cultivation, processing and distribution of CBD products. Bridge Farm has several state-of-the-art, fully operational facilities and established relationships with a number of large U.K. and multi-national retailers. Bridge Farm holds an industrial hemp cultivation licence and a high-THC research and development licence, which enables it to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. Upon receipt of a commercial controlled substances licence, Bridge Farm will have the ability to produce cannabis derived products at low cost, driven by Bridge Farm’s scale, automation and energy subsidies. The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.
To enhance and differentiate the Company’s medical cannabis offerings, Sundial is working to build research capabilities, proprietary strains and novel extracts for the use of cannabis-based medical treatments. The Company has established partnerships with a number of private and public Canadian research institutions to facilitate a research-informed approach to identify and develop strain-specific treatments and novel extracts for targeted medicinal use. In addition, in 2019, the Company acquired a 50% interest in Pathway Rx, which uses advanced technology and an extensive library of cannabis strains to identify and customize targeted treatments for a wide range of medical conditions.
Our Industry
Adult-use Cannabis
We are currently serving the adult-use cannabis industry in Canada. In October 2018, Canada became the first major industrialized nation to legalize adult-use cannabis at the federal level. On October 17, 2019, the Canadian government has amended the Cannabis Regulations and Schedules to the Cannabis Act, to permit the production and sale of cannabis edibles, extracts and topicals by holders of federal licenseslicences specific for these product classes. Products in the new classes were made available for sale to provincially or territorially authorized distributors beginning in December 2019. We expect that additional countries will also legalize adult-use
39
cannabis, creating the opportunity for us to serve the adult-use market in those other countries in the future, although we cannot predict whether and when this will occur.
CBD
In Canada, the updated Industrial Hemp Regulations (Canada) (the “IHR”) under the Cannabis Act replaced the previous form of the Industrial Hemp Regulations (Canada) under the Controlled Drugs and Substances Act (Canada) on October 17, 2018. The World Health Organization has recently recommended that CBD should no longer be classifiedregulatory scheme for industrial hemp largely remains the same; however, the IHR permits the sale of hemp to federally licensed cannabis processors under certain circumstances, and licensing requirements were softened in accordance with the perceived lower risk posed by industrial hemp. The IHR defines industrial hemp as a controlled substance, a move supportedcannabis plant, or any part of that plant, in which the concentration of THC
40
is 0.3% by weight or less in the European Parliament. Certainflowering heads and leaves. In Canada, cannabis products containing CBD products have recently been addedare subject to the European Union’s Novel Food Catalogue, which will help provide a regulatory framework for EU member states to follow. CBD products have become available inCannabis Act and the United Kingdom, Germany, Spain and other European countries. Further to designationCannabis Regulations. Not every activity involving industrial hemp falls within the scope of the IHR. For example, the extraction of CBD asor another phytocannabinoid from the flowering heads, leaves and branches of the plant falls under the Cannabis Regulations and requires a “novel food” in the European Union, the United Kingdom recently moved to introduce a regulatory framework for CBD products. In February 2019, the UK Food Standard Agency (“FSA”) issued a statement requiring suppliers of CBD-infused food products to submit a novel food authorization application by March 31, 2021, after which date any CBD products without a valid application submitted will not be permitted to stay on the market.cannabis processing licence.
Furthermore, although we do not currently have plans to address the U.S. CBD market in the near term, recently adopted U.S. federal legislation has legalized hemp-derived CBD products, subject to certain conditions, including compliance with state and federal regulations.
MedicalOur Cannabis Operations
As of December 31, 2019, 41 countries have legalized medicalSundial currently produces and markets cannabis in some form. In addition, the European Parliament passed a resolution callingproducts for the European UnionCanadian adult-use market. The Cannabis Act provides provincial, territorial and municipal governments with the authority to distinguish between medicalprescribe regulations regarding retail and other usesdistribution of recreational cannabis. As such, the distribution model for recreational cannabis differs from province to province. Some provinces have government-run retailers, while others have government-licensed private retailers, and some have a combination of the two. All of the Company’s sales are conducted according to the applicable provincial and territorial legislation and through applicable local agencies. The Company has established supply agreements with nine Canadian provinces and has a distribution network that covers 98% of the national recreational cannabis industry.
The Company’s primary focus in the cannabis operations segment has been on producing and distributing premium inhalable products and brands (flower, pre-rolls and vapes). Upon receiving a licence from Health Canada to sell cannabis oil products, the Company began the sale and distribution of cannabis increase funding for research regarding medical cannabis and require insurance coverage for effective cannabis-based medication.
We offer and continue to develop cannabis brands for the adult-use market. Currently, we sell dried flower cannabis, pre-rolls and vapes and intend to sell additionalvape products in a wide-range of formats, such as edibles, oils, capsules and sublinguals, in accordance with existing regulations.December 2019.
SundialThe Company is currently marketing ourits adult-use products under the followingits Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value) brands and intends to introduce new products under these brands as it expands its brand portfolio:portfolio.
Sundial’s operations cultivate cannabis using an individualized “room” approach, in approximately 448,000 square feet of total available space. Sundial – The Sundial product line encompasses five experiences: Calm, Ease, Flow, Liftis headquartered in Calgary, Alberta, with operations in Olds, Alberta, and Spark. Initial sales consisted primarily of two whole flower products sold under our Sundial brand: Zen Berry, which is a indica-dominant whole dried flower under the Calm series,Rocky View County, Alberta.
Production and Daydream, which is a hybrid whole dried flower under the Flow series.During the second half of 2019, we introduced Lemon Riot and Citrus Punch as part of our Lift series and introduced Berry Bliss and Twilight as part of our Calm series. Sundial plans to continue the launch of new product formats and strains under the Ease and Spark series, while launching vape formats under our Lift, Calm and Flow series going forward in 2020.
Grasslands - To maximize the value of our cultivation assets, Sundial developed and deployed the Grasslands brand during the fourth quarter of 2019. The Grasslands brand focuses on value-driven inhalable products and provides Sundial with increased flexibility in the Company’s production and distribution strategies and practices. The Grasslands brand has released multiple products to British Columbia, Alberta, Saskatchewan and Manitoba markets and will continue to expand distribution to other provincial jurisdictions in 2020.
Palmetto – Launched during the fourth quarter of 2019, the Palmetto brand offers convenient, ready-to-use products to accommodate consumers looking for a user-friendly cannabis experience. Palmetto's initial strain offering for pre-rolls is Agent Orange, a sativa-dominant hybrid with the distinct smell and taste of fresh Florida oranges. Additional product formats under the Palmetto brand, including vape pens, along with additional strain offerings, will continue to be developed and offered going forward into 2020.
Top Leaf – In the fourth quarter of 2019, Sundial launched its Top Leaf brand with the release of Strawberry Cream whole flower, with initial shipments to Alberta, British Columbia and Nova Scotia. Distribution of Top Leaf products is expected to continue to expand to other provincial jurisdictions in 2020, along with the release of several new Top Leaf products including Strawberry Cream and Jager OG whole flower and vape cartridges.
40
Our purpose-built indoor modular grow rooms enable us to produce large volumes of cannabis in small batches. Our individual room-based cultivation format affords us several advantages compared to other growing methods, including optimized and customizable environments for each one of our strains, efficient scaling of our production capacity, higher and more predictable yields and real-time collection of cultivation data and multiple harvests per day. Different strains may have different harvest cycles and different harvest yields. Our modular cultivation rooms have been designed with the objective of improving our ability to learn, experiment and improve our cultivation process and end products. This approach also helps mitigate the risk of crop loss.
We do not operate our own retail stores. We use analytics based on customerSpecialized Skill and consumer data and research to develop and market our branded products. In the long term, we intend to develop value-add tools which would include digital kiosks with interactive content, point-of-sale materials, cannabis journals and customized strain descriptions designed to educate and enhance consumer engagement in compliance with applicable regulations.Knowledge
Bridge Farm’s current facility footprint is approximately 1.7 million square feet and plans are in place to complete expansion to approximately 2.4 million square feet by the endAll aspects of the second quarterCompany’s business require specialized skills and knowledge. The Company’s management is comprised of 2020. Bridge Farm has highly automated, state-of-the-art facilitiesindividuals with advanced plant movementextensive experience and monitoring technology. Through its use of biomass fuel for heating, Bridge Farm qualifies for a U.K. government credit that more than offsets its energy costs. In addition, Bridge Farm has existing distribution relationships with retailersexpertise in the United Kingdom. Over time, as the global CBD regulatory landscape continues to evolve, we may leverage such relationships to launch CBD product sales in the United Kingdom as well as establish new partnerships with international retailers to expand globally.
Bridge Farm holds a hemp cultivation licence at its Homestead Facility, making it one of the few indoor producers licensed to cultivate hemp in the United Kingdom. Bridge Farm currently cultivates hemp in approximately 40,000 square feet at the Homestead Facility. Bridge Farm also holds a high THC research and development licences which enables us to conduct research and development for phenotyping exercises and refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants.
We continue to operate Bridge Farm’s existing herbs and ornamental flower business and cultivation operations in compliance with debt covenants and expect to do so until such time as we may need to transition more space to hemp cultivation and CBD extraction in order to meet demand for our future CBD products, subject to available capital resources as well as certain regulatory, licensing and other restrictions.
The Company is currently conducting a strategic review of Bridge Farm,areas including, but not limited to, acultivation of cannabis, consumer packaged goods, product development, strategy, analytical testing and legal and regulatory compliance.
Specialized skills and knowledge are important to the Company’s success as it continues to evolve with the industry and grow its brands, and we continue to build on the skills and knowledge required within our organization to meet our goals.
Competitive conditions
The Company’s cannabis operations face enhanced competition from others who are licensed under the Cannabis Act and the various provincial and territorial regulatory regimes to participate in the adult-use cannabis industry. The Cannabis Act and the various provincial and territorial legislation have established licensing regimes for the cultivation, production, processing, testing, packaging, labelling, delivery, transportation, distribution, sale, possession and disposal of allcannabis for adult use.
Pursuant to transitional provisions in the Cannabis Act, existing holders of its assets.medical cannabis licences under the Access to Cannabis for Medical Purposes Regulations have, subject to satisfying certain requirements, automatically been deemed licensed under the Cannabis Act for corresponding activities, and other individuals and corporations are now able to apply for such licences.
Our ResearchSubject to certain restrictions set out in the Cannabis Act, adults are permitted to cultivate, propagate, harvest and Innovationdistribute up to four cannabis plants per household.
We ownexpect that competition in the adult-use cannabis market and other cannabis markets in which we expect to participate will become more intense as current and future competitors begin to offer an increasing number of diversified products. To remain competitive, we will require a 50% interestcontinued high level of investment in Pathway Rx,research and development, marketing, sales and client support.
41
We also face competition from the illicit cannabis market. Illegal dispensaries and ‘black market’ operations and participants, despite not having a companyvalid licence under the Cannabis Regulations, command a significant percentage of the total market for cannabis and cannabis products in Canada.
As well, the legal landscape for medical and adult-use cannabis is changing internationally. An increasing number of jurisdictions globally are passing laws that uses advanced technologies,allow for the production and distribution of medical or adult-use cannabis. Increased international competition, including machine learning approaches,competition from suppliers in other countries who may be able to screen an extensive library ofproduce at lower cost, and limitations placed on us by Canadian or other regulations, might lower the demand for our products on a global scale.
Components
In the cultivation process, obtaining seeds for growing cannabis strainsmust be done in accordance with the ultimate goalCannabis Act. Seeds can be obtained from Health Canada, imported from a jurisdiction for medical purposes, or acquired from another Licence Holder. An authorization from Health Canada may be required to conduct such a transaction depending on its nature.
Intangible Properties
The ownership, licensing and protection of being abletrademarks and other intellectual property rights are significant aspects of our future success. Currently we rely on trade secrets, technical know-how and proprietary information. We protect our intellectual property by seeking and obtaining registered protection where possible, developing and implementing standard operating procedures to identifyprotect trade secrets, technical know-how and customize treatments for symptoms associatedproprietary information and entering into agreements with parties that have access to our inventions, trade secrets, technical know-how and proprietary information, such as our partners, collaborators, employees and consultants, to protect confidentiality and ownership. We also seek to preserve the integrity and confidentiality of our inventions, trade secrets, trademarks, technical know-how and proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems.
Economic Dependence
The Company’s supply contracts with the various Canadian provinces are a wide rangecritical element of medical conditions. In the future, we intendCompany’s current revenues. If any larger Canadian provinces change the material terms of such agreement or otherwise alter the supply arrangement with the Company, such a change may have a material adverse effect on the Company’s revenue. See “Risk Factors — Risks Related to leverage Pathway Rx’s cannabis strainsOur Business — We currently sell, and expect to develop cannabis-based pharmaceutical drugs, including strains targeted towards symptoms associated with cancer, skin disorders, skin protection and rejuvenation, and inflammatory processes. To date, neither we nor Pathway Rx have submitted any potential drug candidatescontinue to any regulatory body for approval. If we submit drug candidates for approvalsell, a significant share of our product to the applicable drug regulatory authorities, the approval process will be lengthy andprovincial governments through supply contracts that may not generate orders as expected or which may not be successful.renewed.”
Lending
The Company’s lending operations, including the investment policies and lending and investment restrictions are discussed in the section “Business overview — Our Investments — Lending”.
Our Retail Operations
Retail operations comprise the private sale of recreational cannabis through corporate-owned and franchised retail cannabis stores under the “Spiritleaf” retail banner. Spiritleaf aims to be the most knowledgeable and trusted source of recreational cannabis by offering a premium consumer experience and quality curated cannabis products.
Since the legalization of recreational cannabis on October 17, 2018, Inner Spirit has built a strategic portfolio of 105 corporate-owned and franchised Spiritleaf retail cannabis stores in five provinces across Canada. Sundial acquired Inner Spirit on July 20, 2021.
Spirit Leaf Corporate
The Company, through Spirit Leaf Corporate Inc. (“Spirit Leaf Corporate”), opens and operates corporate-owned Spiritleaf retail cannabis stores in strategic locations across Canada in jurisdictions where permitted.
The Company intends to continue to seek and secure leases of real estate locations for potential corporate Spiritleaf retail cannabis stores in jurisdictions where permitted.
Spirit Leaf operations
The Company, through Spirit Leaf Inc. (“Spirit Leaf”), supports a chain of franchised Spiritleaf branded retail cannabis stores in jurisdictions where permitted. The Company also intends to create house brands under the Spiritleaf banner, brand white-label cannabis products with such house brands in jurisdictions where doing so is permitted, and to sell such white-label cannabis products through its own vertical distribution network, which, if and where permitted, may include online, corporate-owned and franchised retail cannabis stores.
42
In addition, Spiritleaf operates an online business through which it sells non-cannabis products (cannabis accessories and apparel) and allows consumers to arrange for pick-up of their orders in-store and through which it plans to, in the future, sell cannabis products, where permitted. A franchise partner of Spiritleaf operates an online store in the province of Saskatchewan, through which it sells cannabis products and accessories.
Production and Services
As a retailer, the Company, through Spirit Leaf Corporate, sells cannabis products, cannabis accessories and other products permitted to be sold in accordance with applicable regulatory frameworks. As a franchisor, the Company, through Spirit Leaf, sells fixtures to franchise partners prior to them opening their Spiritleaf retail cannabis stores, and once such stores open, its sells Spiritleaf cannabis accessories to them.
In general, the Company is only authorized to sell cannabis products purchased from an authorized provincial distributor and cannabis accessories and other items prescribed by the applicable provincial regulator.
Specialized Skill and Knowledge
All aspects of the Company’s retail operations, whether it is the operation of retail cannabis stores, the sale of cannabis and cannabis accessories, the sale of franchises, the ongoing support of franchisees or otherwise, require specialized skills and knowledge. Such skills and knowledge include, among other things, knowledge on franchising, cannabis, cannabis products and accessories, retail, real estate, consumer goods, customer service and the sale of recreational cannabis in Canada.
Competitive Conditions
The private retail cannabis industry in Canada is very competitive, and the Company anticipates increased levels of competition in the industry as new participants enter the market and established retails consolidate. In anticipation of the Cannabis Act coming into effect on October 17, 2018, numerous parties sought and applied for licences to operate retail cannabis stores in jurisdictions where the private retail of cannabis was permitted. As certain jurisdictions moved to a private or semi-private market system for the retail of cannabis, and as regulators increased the aggregate number of licences available for issuance to private cannabis retailers and the pace at which such licences are issued, competition in the private retail cannabis industry continued to increase.
The principal aspects of competition include, among other things, obtaining retail cannabis store licences and regulatory approvals, the availability of cannabis products and cannabis accessories, securing optimal real estate locations and the ability to attract and retain key personnel and customers. The Company believes that its significant competitors are other entities seeking multiple retail cannabis store licences in multiple jurisdictions. It is also important to note that competition between retail cannabis stores is significantly geographical in nature, and the main competition Spiritleaf retail cannabis faces is from other retail cannabis outlets that are located in the same local geographical area and that serve the same consumer demographic.
The Company also faces competition from vertically integrated cannabis companies, existing retailers, government retailers, and the illegal market. The recent consolidation of retail companies in the market is also anticipated to increase competition in the industry, as larger consolidated companies generally have better access to capital and other necessary resources. Increased competition by numerous independent retail cannabis stores and larger competitors could materially and adversely affect the business, financial condition, and results of the Company.
In light of the strong competition in the industry, cannabis retailers are attempting to differentiate themselves from their competitors through retail cannabis store locations, their brands and their product offerings (through perceived quality, product variety and price). Retailers are using a variety of communication strategies to draw attention to these differentiators, including through social media, experiential marketing and traditional print and digital advertising, to the extent possible under the applicable regulatory frameworks.
To remain competitive, the Company and its subsidiaries will require a continued high level of investment in marketing, sales and client support. The Company believes that its product knowledge, experience operating retail outlets, and strategic partnerships with established companies in the cannabis industry, will allow it to offset some of the risks associated with any increased competition in the retail cannabis market.
The Company believes that the experience of management in both the retail and cannabis spaces has and will continue to be a competitive advantage in navigating the highly regulated marketplace.
Vertically integrated competitors
Certain competitors in the retail cannabis industry are also Licensed Producers that are able to produce the products sold at retail stores. Such companies are generally well capitalized and have an established operating history in Canada and may have significant scale and international operations. At the time of this Annual Report, vertically integrated companies are able to compete directly with the Company and its franchise partners in the Alberta and Saskatchewan markets. However, they are subject to regulatory operating restrictions in the major markets of British Columbia and Ontario that are likely to significantly limit their ability to compete directly with the Corporation and its franchise partners in those jurisdictions.
43
Existing retailers
These competitors generally have an existing business with some kind of retail footprint (in liquor sales, cannabis accessories sales, or otherwise) and have already entered or are potentially entering the private retail cannabis market as a growth opportunity. These competitors may also be well capitalized with established retail operations in Canada.
Government retailers
The Company and its franchise partners also face competition from government wholesalers that sell directly to consumers online such as the Ontario Cannabis Store in Ontario and the Alberta Gaming, Liquor and Cannabis Commission in Alberta. In British Columbia, the Company’s franchise partners face additional direct competition from the government in the form of government-owned retail stores.
Illegal market
The Company and its franchise partners face significant competition from persons continuing to operate in the illegal cannabis market in Canada. Management believes that until there is sufficient private retail coverage, methods of engaging potential customers and types of products legally available to consumers, competition from the illicit market will remain significant.
Market Consolidation
It is anticipated that as the retail cannabis industry matures, competitors in the market will consolidate or acquire smaller operators to capitalize on cost synergies and increase their market share. To date, several of the Company’s competitors have increased their retail cannabis store counts and market share through consolidations or acquisitions, or are in the process of consolidating or making acquisitions.
Intangible Properties
The Company aims to be the most knowledgeable and trusted source of recreational cannabis by offering a premium consumer experience and quality curated cannabis products. To achieve that, the Company focuses on associating its brand with high quality product selections and a customer-first experiences. The Company recognizes the importance of its retail brand on its success and its competitiveness in the retail cannabis industry, and the need to protect and enhance its value. In an effort to protect and expand its brand, the Company has applied for, or has received, Canadian trademark protections for certain of its marks. The Company has also applied for United States trademark protections for certain of its marks.
Cycles
To date, the Spiritleaf retail cannabis store network has experienced marginal seasonality, with sales increasing in the summer months from May to August, as well as during the month of December.
Economic Dependence
The Company is not substantially dependent on any individual retail cannabis store, licence, or lease, but the maintenance of our licences and authorizations issued by provincial regulators, generally, is critical to the success of our retail business.
Our Investment and Financial Services Operations
The Company’s investment and financial services operations include the deployment of capital to investment opportunities targeting the global cannabis industry.
The Company invests in cannabis related equity instruments that are traded on public stock exchanges such as the Toronto Stock Exchange or Nasdaq. The Company may also deploy capital to cannabis-related debt and hybrid instruments targeting Canadian cannabis companies. In addition, the SunStream joint venture, in which the Company has an interest, provides financing and other financial services that target the global cannabis industry.
The Company’s investment committee is responsible for evaluating investment opportunities encompassing cannabis-related equity instruments that are traded on public stock exchanges and cannabis-related debt and hybrid instruments targeting the Canadian cannabis industry.
SunStream
On March 15, 2021, the Company and SAF Group announced they had entered into an agreement to form a 50/50 joint venture through a new corporation, SunStream. SunStream is a private company which provides growth capital that pursues indirect investment and financial services opportunities in the global cannabis sector, as well as other investment opportunities.
On December 2, 2021, SunStream IVXX Investment Corp. (“SunStream IVXX”), an affiliate of SunStream, announced that it had submitted a draft registration statement on a confidential basis to the SEC for a proposed initial public offering of its common stock.
44
SunStream IVXX will be a specialty finance company that operates as a closed-end, non-diversified management investment company that anticipates electing to be regulated as a business development company under the Investment Company Act of 1940.
In the United States, SunStream has provided lending services to cannabis businesses in the form of secured debt and hybrid debt and derivative instruments. Sundial, through its involvement in the SunStream joint venture, is classified as having indirect ancillary involvement in the U.S. marijuana industry as referenced in CSA Staff Notice 51-352, which states that ancillary involvement arises when an issuer provides goods and/or services not limited to financing, branding, recipes, leasing, consulting or administrative services to third parties who are directly involved in the U.S. marijuana industry.
Cannabis (or, as referred to in the United States, marijuana) is illegal under U.S. federal law and the enforcement of relevant U.S. laws poses a significant risk to the results of our operations and financial results. For further information about the risks related to U.S. federal laws and regulations with respect to SunStream’s operations, see “Item 3D. Risk Factors—Risks related to our investments—Cannabis remains illegal under U.S. federal law. Strict enforcement of federal laws regarding cannabis would likely result in SunStream’s inability to execute its business plan and may subject us to significant civil or criminal liability and other adverse consequences”.The risk of federal enforcement and other risks associated with the Company’s business are described in “Item 3D—Risk Factors”.
The Company’s involvement in SunStream could have an undetermined impact on the Company’s ability to access both public and private capital.
The Company’s balance sheet exposure is limited to its equity-investment in SunStream of $412.9 million at December 31, 2021, and its share of profit of equity-accounted investees of $32.9 million for the year ended December 31, 2021.
Legal advice has been obtained by SunStream and the Company regarding applicable U.S. federal and state law in relation to SunStream’s business.
The Company is not aware of any of the businesses of recipients of SunStream services being in non-compliance with applicable licensing requirements and the regulatory framework enacted by the U.S. states in which they operate.
SunStream’s investment committee, which includes Sundial’s Chief Executive Officer, is responsible for evaluating investment and financing opportunities encompassing secured debt, hybrid securities and distressed debt and equity targeting the global cannabis industry.
Specialized Skill and Knowledge
All aspects of the Company’s investments require specialized skills and knowledge. The Company’s investment committee and SunStream’s investment committee are comprised of individuals with extensive experience and expertise in areas including, but not limited to, deal sourcing, investment management, client management, reporting and operational requirements, and cannabis operations.
Specialized skills and knowledge are important to the Company’s success as it continues to evolve its investments, and we are workingcontinue to build partnershipson the skills and knowledge required within our organization to meet our financial goals.
Competitive Conditions
Since 2019, the equity capital availability to the Canadian cannabis sector has become increasingly selective and largely unobtainable for smaller licensed producers. This provides a significant opportunity to strategically invest in and consolidate smaller licensed producers with leading research institutions, includingpremium offerings and/or scalable intellectual property to attractive valuations.
Historically, many of the Universitylarger licensed producers were able to obtain asset-backed bank credit facilities secured by their cultivation assets. However, the slower than expected ramp up of Saskatchewan’s Cannabinoid Research InitiativeCanadian national sales caused the banks to significantly reduce their exposure through 2019 and 2020. Bank appetite remains tepid at best for the largest licensed producers and current outstanding credit facilities generally have burdensome covenant packages despite many borrowers having net-cash positions.
The global legal cannabis market is expected to grow substantially over the next few years as public sentiment continues to drive legalization worldwide. Market growth will require an immense amount of Saskatchewan (“CRIS”)capital at a time when regulatory hurdles have sidelined many traditional sources of capital, such as banks and private equity. This has created opportunities to generate attractive risk adjusted returns for investors in Canada, the UniversityUnited States and internationally.
Foreign Operations
The investments segment is dependent upon foreign operations as the majority of Calgary’s Cumming Schoolthe investments through the SunStream joint venture are outside of Medicine,Canada.
45
Investing
Policy and Objectives
General – The overall objective of the Company’s investment policy is to facilitateprotect or enhance funds flow and shareholder value consistent with the Company’s business plan. The policy applies to the investment of all cash, short-term and long-term financial assets of the Company.
Return on Investment – The Company’s investment activities shall be constructed with the objective of attaining a research-informed approachrate of return while meeting the above objectives.
Capital Preservation – Preservation of capital is a primary objective of the Company’s investment activities. Investments shall be undertaken in a manner that seeks to identifyensure the preservation of capital, while managing market risk, credit risk and develop cannabis strains for medical use.interest rate risk.
Liquidity – Investments shall remain sufficiently liquid in order to meet all reasonably anticipated operating capital requirements.
Standard of Care – Investments shall be made with judgement and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence would exercise.
Ethics and Conflicts of Interest – Officers and employees involved with the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program or impair their ability to make impartial investment decisions. Any such personal business activity shall require proper disclosures to the chief executive officer and chief financial officer and to the audit committee in case of a material investment.
Permitted Investment Activities
The following types of investment activities are expressly permitted subject to board of director approved investment activities and limits under which an investment activity may be conducted:
• | Investments in cash |
• | Equity investments |
• | Debt investments |
• | Investments in shares, warrants or other equities, convertible debt securities, derivatives, swaps, options or futures |
• | Other investments, subject to board approval |
Regulatory Framework in Canada
Background to the Cannabis Act and Regulations
On December 13, 2016, the Task Force on Cannabis Legalization and Regulation, which was established by the Canadian federal government to seek input on the design of a new system to legalize, regulate and restrict access to cannabis, published its report outlining its recommendations. On April 13, 2017, the Canadian federal government released Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts, which proposed the enactment of the Cannabis Act to regulate the production, distribution and sale of cannabis for unqualified adult use.
41
On October 17, 2018, the Cannabis Act, together with its accompanying regulations, including the Cannabis Regulations and the IHR and, together with the Cannabis Regulations, the Regulations, came into force. The Regulations, among other things, outline the rules for the legal cultivation, processing, research, testing, distribution, sale, importation and exportation of cannabis and hemp in Canada, including the various classes of licences that can be granted, and set standards for cannabis products that became available for legal sale on October 17, 2018.
Pursuant to the regulatory framework, each province and territory in Canada is also permitted to adopt its own laws governing the distribution, sale and consumption of cannabis and cannabis accessory products within the province or territory. See “—Provincial and Territorial Regulatory Framework for Adult-Use Cannabis” below.
Given that the Cannabis Act and the Regulations were only recently enacted and are still developing, the impact of the regulatory framework on our business is uncertain. See “Risk Factors—Factors — Risks Related to Our Business and Risks Related to Our Industry—Markets and Industry”. Cannabis for adult use only recently became legal in Canada. As a result, the industry and the regulations governing the industry are rapidly developing, and if they develop in ways that differ from our expectations, our business and results of operations may be adversely impacted”.
Adult-Use Cannabis
The Cannabis Act provides a licensing and permitting scheme for the cultivation, processing, research, testing, distribution, sale, importation and exportation of cannabis for non-medicinal use (i.e.(i.e., adult use), to be implemented by regulations made under the Cannabis Act.
In particular, among other things, the Cannabis Act:
46
Restricts the amounts of cannabis that individuals can possess and distribute, public consumption and use, and prohibits the sale of cannabis unless authorized by the Cannabis Act.
• | Restricts the amounts of cannabis that individuals can possess and distribute, public consumption and use, and prohibits the sale of cannabis unless authorized by the Cannabis Act. |
Permits individuals who are 18 years of age or older to cultivate, propagate, and harvest up to and including four cannabis plants in their dwelling-house, propagated from a seed or plant material authorized by the Cannabis Act.
• | Permits individuals who are 18 years of age or older to cultivate, propagate, and harvest up to and including four cannabis plants in their dwelling-house, propagated from a seed or plant material authorized by the Cannabis Act. |
Restricts (but does not strictly prohibit) the promotion and display of cannabis, cannabis accessories and services related to cannabinoids to consumers, including restrictions on branding and a prohibition on false or misleading promotion and on sponsorships.
• | Restricts (but does not strictly prohibit) the promotion and display of cannabis, cannabis accessories and services related to cannabinoids to consumers, including restrictions on branding and a prohibition on false or misleading promotion and on sponsorships. |
Permits the informational promotion of cannabis by entities licensed to produce, sell or distribute cannabis in specified circumstances to individuals 18 years and older.
• | Permits the informational promotion of cannabis by entities licensed to produce, sell or distribute cannabis in specified circumstances to individuals 18 years and older. |
Introduces packaging and labelling requirements for cannabis and cannabis accessories, and prohibits the sale of cannabis or cannabis accessories that could be appealing to young persons.
Provides the designated minister with the power to recall any cannabis or class of cannabis on reasonable grounds that such a recall is necessary to protect public health or public safety.
• | Introduces packaging and labelling requirements for cannabis and cannabis accessories and prohibits the sale of cannabis or cannabis accessories that could be appealing to young persons. |
Permits the establishment of a national cannabis tracking system.
• | Provides the designated minister with the power to recall any cannabis or class of cannabis on reasonable grounds that such a recall is necessary to protect public health or public safety. |
• | Permits the establishment of a national cannabis tracking system. |
Provides powers to inspectors for the purpose of administering and enforcing the Cannabis Act and a system for administrative monetary penalties.
• | Provides powers to inspectors for the purpose of administering and enforcing the Cannabis Act and a system for administrative monetary penalties. |
Cannabis for Medical Purposes
Effective October 17, 2018, the Cannabis Act and the Cannabis Regulations replaced the Controlled Drugs and Substances Act’s CDSA’s Access to Cannabis for Medical Purposes Regulation (“ACMPR”Regulations (Canada) (the “ACMPR”), as the governing regulations in respect of the production, sale and distribution of medical cannabis and related oil products in Canada. Transitional provisions of the Cannabis Act provide that every licence to produce and sell cannabis issued under the ACMPR that was in force immediately before the day on which the Cannabis Act came into force was deemed to be a licence issued under the Cannabis Act, and that such licence will continue in force until it is revoked or expires.
The Cannabis Regulations set out the regime for medical cannabis following legalization, which is substantively the same as the ACMPR with adjustments to create consistency with rules for non-medical use, improve patient access, and reduce the risk of abuse within the medical access system. Patients who have the authorization of their healthcare provider continue to have access to cannabis under the Cannabis Act and Cannabis Regulations, either purchased directly from a federally licensed entity under the Cannabis Act and the Cannabis Regulations, or by registering to produce a limited amount of cannabis for their own medical purposes or designating someone to produce cannabis for them in the manner prescribed.
42
Licences, Permits and Authorizations
The Cannabis Regulations establish six classes of licences:
licence for cultivation;
• | licence for cultivation; |
licence for processing;
• | licence for processing; |
licence for analytical testing;
• | licence for analytical testing; |
licence for sale for medical purposes;
• | licence for sale; |
licence for research; and
• | licence for research; and |
a cannabis drug licence.
• | a cannabis drug licence. |
The Cannabis Regulations also create sub-classes for cultivation licences (standard cultivation, micro-cultivation and nursery) and processing licences (standard processing and micro-processing). Different licences, and each sub-class therein, carry differing rules and requirements that are intended to be proportional to the public health and safety risks posed by each licence category and each sub-class. Producers holding production and sales licences under the ACMPR were transferred to similar licences under the Cannabis Act. Licences issued under the Cannabis Regulations have associated expiry dates and are subject to renewal requirements.
As of May 8, 2019, Health Canada will requirerequired that new applicants for cannabis licences under the Cannabis Act to have a fully built site that meets all requirements of the Cannabis Regulations at the time of their application. Existing applicants will not be substantively reviewed until the facilities associated with a licence application are fully constructed and accepted by Health Canada as to have met all requirements of the Cannabis Regulations.
Security Clearances
Certain people associated with cannabis licensees, including individuals occupying “key positions”, such as directors, officers, individuals who exercise, or are in a position to exercise, direct control over the corporation licensee, and individuals identified by the Canadian Federal Minister of Health (the “Minister of Health”), must hold a valid security clearance issued by the Minister of Health.
47
Under the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry. However, grant of security clearance to such individuals is at the discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis.
All of our directors and executive officers have obtained security clearance from Health Canada with the exception of Greg Mills, and Bryan Pinney (two of our directors) and Zach George (our Chief Executive Officer and director).Canada. Failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations. See “Item 3D Risk Factors—“Risk Factors — Risks Related to Our Business and Risks Related to Our Industry—Markets and Industry — Our future success is dependent on our ability to attract or retain key personnel”.
Cannabis Tracking System
Under the Cannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis tracking system. The purpose of this system is to track cannabis throughout the supply chain, to help prevent cannabis from being diverted to an illicit market or activity and to help prevent illicit cannabis from being a source of supply of cannabis in the legal market. Pursuant to the Ministry of Health’s Cannabis Tracking System Order, holders of a federal licence for cultivation, a licence for processing or a licence for sale for medical purposes that authorizes the possession of cannabis, must report monthly to the Minister of Health with specific information about their authorized activities with cannabis (e.g.(e.g. cannabis inventory quantities), in the form and manner specified by the Minister of Health. The order also provides for monthly reporting by provincial bodies and provincially authorized private retailers of certain information in the form and manner specified by the Minister of Health.
Cannabis Products
The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level, including the THC content and serving size of cannabis products and cannabis products containing CBD. As of October 17, 2019, the Cannabis Act and the Cannabis Regulations permit the sale, subject to certain transitional periods, of only dried cannabis, fresh cannabis, edible cannabis, cannabis extracts, cannabis topicals, cannabis plants and cannabis plant seeds, each as defined in the Cannabis Act.
Prior to the coming-into-effect of the amended forms of the Cannabis Act and Cannabis Regulations, which occurred on October 17, 2019, the Cannabis Act only permitted the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants and cannabis plant
43
seeds. The amended forms of the Cannabis Act and Cannabis Regulations (i) remove cannabis oil from the list of permitted classes of cannabis products and (ii) authorize and regulate the production and sale of edible cannabis, cannabis extracts and cannabis topicals.
The amended forms of the Cannabis Act and Cannabis Regulations introduced restrictions on product composition specific to each of edible cannabis, cannabis extracts and cannabis topicals, including specific THC limits. Examples of other class-specific restrictions include:
• | Edible cannabis: must be shelf stable; only food and food additives will be allowed to be used as ingredients in edible cannabis and the use of food additives will need to be in accordance with the limits and purposes that are prescribed for foods; must not have caffeine added, however the use of ingredients containing naturally occurring caffeine will be permitted in edible cannabis products provided that the total amount of caffeine in each immediate container does not exceed 30 milligrams; must not contain alcohol in excess of 0.5% w/w; must not contain anything that would cause the sale of the edible cannabis, if it was a food regulated under the Food and Drugs Act (Canada), to be prohibited and must not be fortified with vitamins or mineral nutrients. |
Edible cannabis: must be shelf stable; only food and food additives will be allowed to be used as ingredients in edible cannabis and the use of food additives will need to be in accordance with the limits and purposes that are prescribed for foods; must not have caffeine added, however the use of ingredients containing naturally occurring caffeine will be permitted in edible cannabis products provided that the total amount of caffeine in each immediate container does not exceed 30 milligrams; must not contain alcohol in excess of 0.5% w/w; must not contain anything that would cause the sale of the edible cannabis, if it was a food regulated under the Food and Drugs Act (Canada), to be prohibited and must not be fortified with vitamins or mineral nutrients.
• | Cannabis extracts: must not contain ingredients that are sugars, sweeteners or sweetening agents, nor any ingredient listed on Column 1 of Schedule 2 to the Tobacco and Vaping Products Act (Canada) (which is a list of ingredients that are prohibited in vaping products) except if those ingredients and their levels are naturally occurring in an ingredient used to produce the extract. |
Cannabis extracts: must not contain ingredients that are sugars, sweeteners or sweetening agents, nor any ingredient listed on Column 1 of Schedule 2 to the Tobacco and Vaping Products Act (Canada) (which is a list of ingredients that are prohibited in vaping products) except if those ingredients and their levels are naturally occurring in an ingredient used to produce the extract.
Cannabis topicals: must not contain anything that may cause injury to the health of the consumer when the product is used as intended or in a reasonably foreseeable way.
• | Cannabis topicals: must not contain anything that may cause injury to the health of the consumer when the product is used as intended or in a reasonably foreseeable way. |
As is the case for cannabis oil, a processing licence is required in order to legally produce edible cannabis, cannabis extracts and cannabis topicals. Though a processing licence is required in order to package and label all types of cannabis products for sale to consumers. Holders of processing licences issued prior to October 17, 2019, were required to amend their processing licences before they could begin manufacturing products constituting edible cannabis, cannabis extracts or cannabis topicals. The Cannabis Regulations require the filing of a notice with Health Canada at least 60 days before releasing a new cannabis product to the market. As a result, mid-December 2019, was the earliest date that any products constituting edible cannabis, cannabis extracts or cannabis topicals could be made available for sale to consumers.
In addition, if a holder of a processing licence chooses to process edible cannabis and food products on the same site, then the production, packaging, labelling, and storage of cannabis and the production, packaging, and labelling of food products must be
48
conducted in distinctly separate portions of the holder’s licensed facility. All cannabis production is required to occur in a sufficiently separate area from any food production.
Packaging, Labeling and Advertising
The Cannabis Regulations set out requirements pertaining to the packaging and labelling of cannabis products. These requirements are intended to promote informed consumer choice and allow for the safe handling and transportation of cannabis, while also reducing the appeal of cannabis to youth. The Cannabis Regulations require all cannabis products to be packaged in a manner that is tamper-proof and child-resistant.child resistant.
Limits are also imposed on the use of colors, graphics, and other special characteristics of packaging. For example, all-over packaging wraps must be clear, and the interior surface and exterior surface of any container in which a cannabis product is packaged must be one uniform color. Cannabis package labels must include specific information, such as (i) product source information, including brand name, the class of cannabis and the name, phone number and email of the licensed processor or cultivator, (ii) mandatory warnings, including rotating health warning messages on Health Canada’s list of standard health warnings; (iii) the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content. Amendments to the Cannabis Regulations effective as of October 17, 2019, impose additional packaging and labelling requirements for all classes of cannabis production.
A cannabis product’s brand name may only be displayed once on the principal display panel or, if there are separate principal display panels for English and French, only once on each principal display panel. It can be in any font style and any size, so long as it is equal to or smaller than the health warning message. The font must not be in metallic or fluorescent color. In addition to the brand name, only one other brand element can be displayed. Such brand element must meet the same requirements as the brand name, noted above, and if an image, it must be in a size equal to or smaller than the surface area of the standardized cannabis symbol.
Promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to be implemented in a limited number of prescribed manners (e.g., at the placepoint of salesale) and is subject to prescribed conditions set out in the Cannabis Act and the Cannabis Regulations. Also, among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding, depictions of a person, character or animal, whether real or fictional, and promotion that is appealing to young persons.
44
Health Products Containing Cannabis
Health Canada is taking a scientific, evidenced-based approach for the oversight of health products with cannabis that are approved with health claims, including prescription drugs. Under the current regulatory framework, these health products are subject to the Food and Drugs Act (Canada) and its regulations, in addition to the Cannabis Act and the Regulations. For many of these products, such as drugs, pre-market approval is required.
Drug Approval Process
Manufacturers of prescription drugs must receive authorization from Health Canada before prescription drugs may be sold. In order to obtain such authorization, a manufacturer must file a robust regulatory submission with evidence of safety, efficacy and quality of the proposed drug. As part of the approval process, Health Canada reviews the evidence submitted to ensure that the product complies with applicable safety, efficacy and quality requirements. Health Canada’s review of the evidence and a manufacturer’s response to Health Canada’s inquiries can take several years from the date that the manufacturer files its regulatory submission. A manufacturer is prohibited from marketing its product claiming to provide a health benefit, until Health Canada issues the authorization to the manufacturer for the product for the health benefit. There is no assurance that Health Canada will issue an authorization for a product. The typical regulatory process for prescription drug approval from pre-market to post-market in Canada, involves (1) pre-clinical studies, using for example, laboratory studies involving cell or tissue samples, or tests conducted on animals, to collect preliminary safety and efficacy data, (2) clinical trials on human subjects, which require authorization by Health Canada to collect further safety and efficacy data, (3) a drug submission with Health Canada, (4) drug submission review by Health Canada, (5) market authorization decision by Health Canada, and (6) post-market authorization public access to the drug product, subject to surveillance, inspection and investigation by Health Canada. In the United States, drug approval is regulated by the FDA and follows a similar process.
Import and Export Permits for Medical or Scientific Purposes
Pursuant to the Cannabis Act, import and export licences and permits will only be issued for medical or scientific purposes, or for industrial hemp. The Cannabis Regulations set out the process by which a licence holder may apply for an import or export permit for medical or scientific purposes. A permit must be obtained for each shipment of cannabis. An application for an import or export permit must contain specific information including the name and address of the holder, licence number and specifics of the particular shipment including the intended use of the cannabis and specific shipment details. The Cannabis Regulations contain reporting requirements in respect of the import and export of cannabis in reliance on a permit issued under the Cannabis Regulations.
49
Provincial and Territorial Regulatory Framework for Adult-Use Cannabis
Pursuant to the regulatory framework, each province and territory in Canada is also permitted to adopt its own laws governing the distribution, sale and consumption of adult-use cannabis and cannabis accessory products within the province or territory. As a result, provincial and territorial governments may choose to set lower maximum permitted quantities for individuals and higher age requirements. Currently, each of the Canadian provincial and territorial jurisdictions has established a minimum age of 19 years old for the consumption of adult-use cannabis, except for Québec and Alberta, where the minimum age is 18.21 and 18, respectively.
Retail-distribution models vary nationwide from one province and territory to another. All Canadian provinces and territories have implemented mechanisms for the distribution and sale of cannabis for adult-use purposes within their jurisdictions. Quebec, New Brunswick, Nova Scotia and Prince Edward Island have adopted government-run models for retail and distribution. Ontario, British Columbia, Alberta, Manitoba and Newfoundland have adopted hybrid models, with some aspects, including stores, distribution and online retail being government-run, (subject to certain exceptions for private online sales), while allowing for private retail. Saskatchewan has implemented a private retail system. Yukon, Northwest Territories and Nunavut have adopted a model that resembles their government-run liquor distribution model. However, New Brunswick has introduced plans to incorporate privately owned cannabis retail stores into its permitted distribution model. As the laws continue to evolve, and the distribution models mature, there is no assurance that provincial and territorial legislation enacted for the purpose of regulating adult-use cannabis will remain the same or otherwise continue to allow, or be conducive to, our business model. Differences and changes in provincial and territorial regulatory frameworks could result in, among other things, increased compliance and supply costs.
Municipal and regional governments may also choose to impose additional requirements and regulations on the sale of adult-use cannabis, adding further uncertainty and risk to our business. Municipal by-laws may restrict the number of adult-use cannabis retail outlets that are permitted in a certain geographical area, or restrict the geographical locations wherein such retail outlets may be opened. See “Item 3D Risk Factors—“Risk Factors — Risks Related to Our Business and Risks Related to Our Industry—Markets and Industry — Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.”
As of the date of this Annual Report, we believe we are in compliance in all material respects with the Cannabis Act and the Regulations, and all other applicable Canadian federal and provincial laws and regulatory requirements relating to cannabis, with the exception of obtaining security clearance from Health Canada for certain of our executive officers and directors, which we are
45
working to obtain. In addition, our directors, officers and certain other key employees are subject to security regulations due to the nature of our industry, which may make it more difficult for us to attract, develop and retain talent. See “Item 3D Risk Factors—“Risk Factors — Risks Related to Our Business and Risks Related to Our Industry—Markets and Industry — Our future success is dependent on our ability to attract or retain key personnel.”
Regulatory Framework in the United Kingdom
CBD Regulation—Overview
Cannabis, cannabis resin, cannabinol and other cannabinol derivatives (among others) are listed as Class B controlled drugs under Schedule 2, of the Misuse of Drugs Act 1971, (the “MDA”), based on a harms assessment. They are also listed under Schedule 1 to the Misuse of Drugs Regulations 2001, the (“MDR”), together with other chemical constituents such as the cannabinoid THC (defined below). As such, it is unlawful to cultivate, possess, supply, produce, import or export these controlled drugs except under licence. The Hemp (Third Country Imports) Regulations 2002 also require, except in specified circumstances, that hemp from non-EU countries be imported under a licence and, in the case of hemp seeds other than for sowing, under an authorization.
CBD is one of the main chemical compounds found in the cannabis plant, together with THC. CBD, as an isolated substance (i.e containing no THC) is not a controlled drug under the MDA/MDR. Unlike CBD, THC is the main ‘psychoactive’ component of cannabis and is a controlled drug.
A CBD product containing THC (in any amount), or any other controlled cannabinoid under the regulations can not be practically prescribed, administered or supplied to the public unless it is an ‘exempt product’ or a cannabis based product for medicinal use in humans (“CBPM”). CBPMs are subject to further regulation and licencing given the medicinal purpose for which they are marketed and prescribed.
The U.K. Home Office (specifically, the Drugs & Firearms Licensing Unit (“DFLU”)) prescribes two separate licencing regimes relating to cannabis cultivation, according to whether the varieties are high THC (above 0.2% THC content) or low THC (below 0.2% THC content). A licence is required to cover both cultivation and possession.
The sale of CBD products (i.e the “finished products” following extraction and processing of CBD into products) is subject to additional regulations and licencing regimes – see below CBD Extraction for General Commercial Purposes and CBD Extraction for Medicinal Purposes for a more detailed discussion.
Low-THC Cultivation Licence (Industrial Hemp)
Cultivation of low-THC cannabis (known as industrial hemp) is permitted under licence in the United Kingdom. Under the MDA, where low-THC cannabis is grown for the commercial production of industrial hemp fiber or the pressing of seed for oil, only the non-controlled parts of the plant can be used, i.e., seeds and fibre/mature stalk. The controlled parts of the plant (i.e., the flowers and leaves, which produce higher concentrations of CBD) must be retted at the licensed location or otherwise lawfully disposed of after harvesting. There needs to be a defined commercial end use and the Home Office only issued licences for cultivation of plants from approved seed types with a THC content not exceeding 0.2%.
Prospective licensees must first register with the Home Office and submit an online application form known as a “MD 29 Application” which provides inter alia the following details: the field location numbers, hectarage details, farm map and seed type, THC content and confirmation of whether the respective seed is an EU-approved seed. Applicants must also undergo a check by the U.K. Disclosure and Barring Service (“DBS”) (formerly, the Criminal Records Bureau) to be eligible for a licence and may be subject to a compliance visit. The licence must be issued before a grower can commence cultivation. It may contain conditions and restrictions, such as where the crop may be grown, and is typically issued for a term of three growing seasons. Bridge Farm currently holds a hemp cultivation licence granted by the U.K. Home Office at one of its facilities and cultivates hemp in a portion of this facility.
High-THC Cultivation Licence
Cultivation of high-THC cannabis (where the THC content exceeds 0.2%) is also permitted under licence in the U.K. These licences may be issued by the Home Office to cultivate, produce and supply high THC for research purposes and to enable the lawful extraction of controlled cannabinoids.
Extraction of a higher concentration of CBD (which is an uncontrolled drug in its pure form) often requires use of the controlled parts of a cannabis plant (i.e., flowers and leaves). Where a proposal of this nature is made, it would be considered by the Home Office within the remit of their high-THC cultivation licensing policy.
46
Companies wishing to possess, supply, produce/manufacture, import or export ‘controlled drugs’ can only lawfully do so under a Controlled Drugs Licence issued by the Home Office.
Applications for a controlled drug licence are submitted online and prospective licensees are advised that it can take up to 16 weeks for the Home Office to review and ensure that various security and record- keeping requirements have been met. Where an enhanced DBS check has been obtained within the last three years for all persons named on the application, such checks do not need to be repeated. The DFLU may also conduct site visits, where needed. The term of the licence is typically one year from the date of issuance and is not renewable.
CBD Extraction for General Commercial (Retail) Purposes
CBD products such as CBD oil are becoming increasingly prevalent in the U.K. retail market. Where a CBD product contains a controlled drug (in any quantity) such as THC, the product needs to satisfy the requirements for an ‘exempt product’ under the MDR to be lawfully available to the public.
In general, an exempt product is a product containing a controlled drug that is: (a) not designed to be administered to a human being or animal, (b) not packaged in such a way that it can be recovered by readily applicable means, and (c) does not contain more than 1 mg (per container) of the controlled drug. All three elements are required to be established, including significant testing by an independent and licensing U.K. company and the provision of comprehensive and independently verifiable research and information. Notably, the 0.2% THC threshold for the cultivation of industrial hemp does not apply to CBD finished products, Rather, only 1 mg of THC (per container) is permissible in any given product that is placed on the U.K. market.
CBD Extraction for Medicinal Purposes (Medical Cannabis)
CBPMs are preparations or products that are: (a) or contain cannabis or other cannabinol derivatives, (b) produced for medicinal use in humans, and (c) a medicinal product, substance or preparation for use as an ingredient in a medicinal product. A CBD preparation or product containing controlled cannabinoids (e.g., THC) which meets the three elements of this definition may be a CBPM.
Companies wishing to possess, supply and or import/export CBPMs will require a controlled drug licence in addition to a high-THC cannabis cultivation licence if they are involved in production/manufacturing, which are both issued by the Home Office, unless an exemption applies to that licensing requirement.
In addition, the regulation of CBPMs in the U.K. is undertaken by the Medicines and Healthcare Products Regulatory Agency (the “MHRA”). The MHRA is responsible for ensuring all medicines and medical devices in the U.K. are safe and appropriate in accordance with the Human Medicines Regulations 2012 (SI 2012/1916) (“HMR”). Under the HMR, CBPMs must be manufactured and assembled in accordance with the specifications of a doctor listed on the General Medical Council Specialist Register and must meet a ‘special’ clinical need of the individual patient.
The manufacturer or assembler of a CBPM must also hold a Manufacturer’s “Specials” Licence granted by the Licencing Authority (specifically, the UK Ministers designated under the HMR). The manufacturing and/or assembly site and its operations will be inspected for compliance with the European Union’s ‘good manufacturing practice’ and the conditions of the licence. These require that the manufacture or assembly is carried out under the supervision of appropriately qualified staff, including a named quality controller and production manager, who are acceptable to the Licensing Authority. Licence applications are submitted online to the MHRA and take approximately 90 business days to process.
CBD Sales and “Novel Food” Status
In the United Kingdom, the sale of CBD products falls under the regulatory purview of the FSA. The FSA, in turn, follows the guidance and regulations set by the European Union, specifically the European Food Standards Agency, the EFSA, and the European Commission (the “EC”), respectively.
In November 2015, the European Parliament and the Council of the European Union adopted a new regulation on novel food, Regulation (EU) 2015/2283 (the “Novel Food Regulation”), with the intent of making the novel food authorization process more efficient while ensuring high standards of food safety for consumers. The Novel Food Regulation came into force on January 1, 2018.
The Novel Food Regulation provides that a food is “novel” if it has not been used for human consumption to a significant degree within the European Union before May 15, 1997. The regulations further provide that a food stuff will be authorized only if it can be demonstrated that the product is safe, properly labeled so as to not mislead consumers and is not nutritionally disadvantageous.
47
On January 15, 2019, the EC updated the European Union’s Novel Foods Catalogue, specifically, the entries relating to cannabis sativa and cannabinoids, to include other cannabinoids extracts used in food and food supplements and hemp-derived products in food.
While the Novel Foods Catalogue is non-exhaustive and carries no legal effect, it is frequently updated and amended with input from Member States and is used as reference by authorities in EU countries to aid enforcement of the Novel Food Regulation.
A novel food can only be sold in the European Union once it has successfully gone through the authorization process (involving a safety risk assessment) and an implementing act is published authorizing the addition of the novel food to the Novel Foods Catalogue. This process can take up to 18 months from receipt of the initial application. As of the date of this Annual Report, there was one application pending to authorize CBD food supplements in the European Union for adults with a daily intake of up to 130 mg. This application was made by Cannabis Pharma s.r.o, a company from the Czech Republic and is based on publicly available safety and toxicology information and toxicity reviews. A final opinion from the EFSA was expected in March of 2019, but has not yet been provided. If approved, the EC must draft an implementing act authorizing the use of the product within seven months. Any other company that can meet the conditions of use stated in the authorization of the approved product would be able to market CBD food supplements in the European Union.
In March 2019, the Novel Foods Commission met in Brussels to discuss the EC’s classification of CBD as a “novel food”. Various industry groups presented at this meeting and lobbied for a reversal of the decision. As a result, the EFSA is reviewing its original decision to classify CBD as a novel food. A decision is expected “imminently” but there has been no further clarification on this timing. Neither the EFSA nor the FSA have released official guidance in this regard.
To date, the FSA has stated that it accepts the clarification from the European Union that CBD extracts are considered novel foods. In February 2020, the FSA introduced a regulatory framework for CBD, issuing a statement requiring suppliers of CBD-infused food products to submit a novel food authorization application by March 31, 2021, after which date any CBD products without a valid application submitted will not be permitted to stay on the market. See “Risk Factors—Risks Related to Our Business and Our Industry—The United Kingdom’s impending departure from the European Union could adversely affect our ability to execute on our plans for the Bridge Farm facilities”.
It is expected that Brexit will not affect the novel foods status of CBD as under the United Kingdom’s proposed Withdrawal Act, the Novel Food Regulations will be adopted as U.K. law.
C. | Organizational structure. |
Below, and attached as Exhibit 8.1 to this Annual Report, is the list of our significant subsidiaries as at December 31, 2019,2021, each of which is directly or indirectly wholly-owned by Sundial unless otherwise indicated.
Subsidiaries | Principal activity | Jurisdiction of incorporation | Equity ownership | Non-controlling interest (“NCI”) |
KamCan Products Inc. | Inactive | British Columbia, Canada | 100% | 0% |
Sundial Deutschland GmbH | Inactive | Germany | 100% | 0% |
2657408 Ontario Inc. | Operations | Ontario, Canada | 100% | 0% |
NGBA-BC Holdings Ltd. | Operations | British Columbia, Canada | 100% | 0% |
Sundial Insurance (Bermuda) Ltd. | Operations | Bermuda | 100% | 0% |
Inner Spirit Holdings Ltd. | Operations | Alberta, Canada | 100% | 0% |
Spirit Leaf Inc. | Operations | Alberta, Canada | 100% | 0% |
Spirit Leaf Corporate Inc. | Operations | Alberta, Canada | 100% | 0% |
Spirit Leaf Ontario Inc.(1) | Operations | Ontario, Canada | 0% | 100% |
48
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. |
|
|
Information regarding our material tangible fixed assets areis as follows:
|
|
|
|
|
| Olds,
| Rocky View,
| Merritt,
| Bridge Farm,
|
Format | Indoor Modular | Indoor | Indoor Modular | Greenhouses |
Primary Purpose | Cultivation and | Research and | Cultivation and | Cultivation and |
Capital expenditures to December 31, 2019 | $180 million | $8 million | $10 million | $65 million |
Capital expenditures remaining (approximately) | $5 - $10 million | — | $15 - 30 million(6) | $64 million |
|
|
|
|
|
Facility Size at December 31, 2019 (Sq. Ft.) | 428,000 | 31,000 | — | 1,596,000(3) |
Additional Facility Size (Sq. Ft.) | 20,000(1) | — | 35,000(2) | 1,991,000(4) |
|
|
|
|
|
Projected Facility Size (Sq. Ft.) | 448,000 | 31,000 | 35,000 | 3,587,000 |
Current Maximum Annual Capacity in Canada(5) | 75 million grams |
|
|
|
Current Utilized Annual Capacity in Canada(5) | 37 million grams |
|
|
|
|
|
|
|
| |||
| Olds,
| Rocky View,
| |||||
Format | Indoor Modular | Indoor | |||||
Primary Purpose | Cultivation and | Research and | |||||
Capital expenditures to December 31, 2021 | $183 million | $8 million | |||||
|
|
| |||||
Facility Size at December 31, 2021 (Sq. Ft.) | 448,000 | 31,000 | |||||
|
|
| |||||
Production Capacity at December 31, 2021 | 71 million grams | — | |||||
Utilized Capacity at December 31, 2021 | 28 million grams | — |
|
|
|
|
|
|
|
|
|
|
49
Bridge Farm Facilities
The Clay Lake Facility is located on our property in Spalding, Lincolnshire, United Kingdom. Clay Lake Phase 1 is an 893,000 square foot facility that was completed in March 2019.
Prior to our acquisition of Bridge Farm, it had completed planning for Clay Lake Phase 2, which is approximately 807,000 square feet, and Clay Lake Phase 3, which is approximately 1.2 million square feet. Following the acquisition of Bridge Farm on July 2, 2019, we continued with the development and construction of Clay Lake Phase 2 through the remainder of 2019 and into the first quarter of 2020. Phase 2 is expected to be completed in the second quarter of 2020. Construction of Clay Lake Phase 3 has been temporarily deferred pending availability of appropriate financing.
The Homestead Facility, located in Spalding, Lincolnshire, United Kingdom, is approximately 218,000 square feet with approximately 110,000 square feet of high-quality and efficient growing sites. We lease the land on which the Homestead Facility is located from Bridge Farm Holdings Ltd, for a term of 30 years from October 8, 2017. Bridge Farm holds a licence to cultivate hemp at the Homestead Facility and cultivates hemp in a portion of this facility.
The Horseshoe Facility, also located in Spalding, Lincolnshire, United Kingdom, is a 484,000 square foot facility with approximately 286,000 square feet of grow space that was completed in March 2016 and provided proof of concept for the energy-efficient, automated and low-cost production model of ornamental plants. We lease the land on which the Horseshoe Facility is located from Bridge Farm Holdings Ltd, for a term of 30 years from October 8, 2017.
Asset Optimization Initiatives
The Company has temporarily suspended construction of its Merritt facilityFacility in British Columbia and is evaluating all options to maximize the value of its asset base. In January 2020, the Company entered into an agreement to sell its Kamloops, British Columbia, property for $2.1 million. The transaction closed on March 27, 2020. Sundial plans
On December 28, 2020, we announced a concentrates licensing agreement based out of our Rocky View Facility. Within the agreement is a non-binding purchase condition to limit capital expendituressell the Rocky View Facility for $5.0 million.
There are no planned facility expansions at this time.
Retail Operations
All of the corporate-owned and franchised Spiritleaf retail cannabis stores are operated from leased premises. The terms of the leases may vary from location to essential expenditures required to completelocation, but the Company and its Olds facility and Clay Lake Phase 2 facility, subject to available capital resources and liquidity. franchise partners typically aim for a lease term of five years, with an option for at least one subsequent renewal for a further five years.
The Company is currently conductinghas a strategic review of Bridge Farm, including, but not limitedreal estate development team and custom mapping software, along with relationships and leases with most major landlords across Canada. It uses the data from over 70 operating locations to a sale of all of its assets.help identify variables that make for an ideal location.
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1 filed herewith for a discussion of our financial condition and results of operations as of and for the year ended December 31, 20192021 as compared to the fiscal year ended December 31, 2018. 2020.
A discussion of liquidityour financial condition and capital resourcesresults of operations as of and for the year ended December 31, 20182020 as compared to the fiscal year ended February 28, 2018December 31, 2019 can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Fiscal Year EndedOperations” filed as Exhibit 15.2 to our annual report on form 20-F for the year ended December 31, 2018 Compared to Fiscal Year Ended February 28, 2018” in our prospectus2020, filed with the SEC on August 1, 2019.March 17, 2021.
For a discussion of liquidity and capital resources as of and for the year ended December 31, 20192021 as compared to December 31, 2018,2020, refer to the sections entitled “Cash Flow Summary” and “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. 15.1
51
A discussion of liquidity and capital resources as of and for the year ended December 31, 20182020 as compared to the fiscal year ended February 28, 2018December 31, 2019, can be found in the sectionsections entitled “Cash Flow Summary” and “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cash FlowsOperations” filed as Exhibit 15.2 to our annual report on form 20-F for the Fiscal Yearsyear ended December 31, 2018 and February 28, 2018” in our prospectus2020, filed with the SEC on August 1, 2019.March 17, 2021.
50
See “Item 4.B –Business Overview—Our Research”Overview” above.
See “Item 4.B –Business Overview—Our Industry” and the section entitled “Strategy & Outlook” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
None.
See the section entitled “Contractual Commitments and Contingencies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
Item 6. Directors, Senior Management and Employees
The following table sets forth certain information regarding our directors and executive officers as of the date of this Annual Report. The terms of office of each of our directors expires on the date of the next annual meeting of our shareholders. The business address for our directors and executive officers is c/o Sundial Growers Inc., #200,#300, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3.
|
|
|
Name, Province or State and Country of Residence
| Age
| Position/Title
|
Zachary George Connecticut, USA |
| Chief Executive Officer and Director |
|
|
|
James Keough Alberta, Canada |
| Chief Financial Officer |
|
|
|
Andrew Stordeur Alberta, Canada |
| President and Chief Operating Officer |
|
|
|
Ryan Hellard British Columbia, Canada |
| Chief |
|
|
|
|
|
|
|
|
|
Greg Mills Ontario, Canada |
| Non-Executive Chairman and Director |
|
|
|
|
|
|
Gregory Turnbull Alberta, Canada |
|
|
|
| Director |
|
|
|
Bryan Pinney Alberta, Canada |
| Director |
Lori Ell(1) Alberta, Canada | 55 | Director |
| (1) | Independent director for the purposes of National Instrument 58-101 – Disclosure of Corporate Governance Practices (the “NI 58-101”), of the Canadian Securities Administrators and the Nasdaq Stock Market Rules (the “Nasdaq Rules”). See “—Corporate Governance—Director Independence”. |
|
|
51
Biographical Information Regarding Our Directors and Executive Officers
Zachary George – Chief Executive Officer and Director
Mr. George joined Sundial as director in November 2019 and was appointed Chief Executive Officer in January 2020. Mr. George has spent more than 15 years evaluating catalyst-based investment opportunities across the capital structure of North American companies with a focus on real assets. Mr. George has worked in a management capacity, including as a chief executive officer, with numerous corporate boards to turn around operations, affect corporate action and implement governance policies in order to maximize shareholder value.
James Keough – Chief Financial Officer
Mr. Keough joined Sundial as Chief Financial Officer in May 2018. Mr. Keough began his career with KPMG and Ernst & Young in Canada and Europe. Prior to joining Sundial, he was a sole practitionertax and finance consultant as a Chartered Professional Accountant (“CPA, CA”), for two and a half years. Prior to that role, he served for 20 years as Chief Financial Officer of a diversified private company with operations in energy, real estate and hospitality. Mr. Keough holds a Bachelor of Commerce degree from the University of Calgary. He holds chartered public accountant (“CPA”), CA, and CPA (USA) designations.
Andrew Stordeur – President and Chief Operating Officer
Mr. Stordeur joined the Company as Chief Commercial Officer in March 2018 and became President – Canada in May 2019 and President and Chief Operating Officer in January 2020. From August 2011 to March 2018, Mr. Stordeur held increasingly senior sales-related positions, including Chief Sales and Customer Officer, at Molson Coors, and has also spent time at Mars Canada. Mr. Stordeur completed a Bachelor of Arts degree (sociology) at the University of Calgary and a Master of Business Administration degree at Queen’s University.
Ryan Hellard – Chief Marketing and ProductStrategy Officer
Mr. Hellard joined the Company as the Chief Marketing and Product Officer in March 2018.2018 and was appointed Chief Strategy Officer on June 1, 2021. From 2012 and until joining Sundial, he held increasingly senior roles, including as President, at AppColony, an agency that develops marketing strategies and digital solutions for Canadian companies. Mr. Hellard completed a Bachelor of Commerce degree at the University of Calgary. Mr. Hellard is the son of one of our directors, Mr. Edward Hellard.
Charlotte Collett – Chief People Officer
Ms. Collett joined the Company as Chief People Officer in June 2018. Most recently, she was Principal Consultant at her company, Charlotte Collett Consulting. Prior to that, she was VP Human Resources at Tervita Corporation. Ms. Collett completed a Business Commerce degree at the University of Calgary. She is a Chartered Professional in Human Resources (“CPHR”), and is a standing member of the CPHR of Alberta.
Louise Motala – Managing Director UK
Ms. Motala was Commercial Director of Bridge Farm when acquired and was subsequently promoted to Managing Director UK in October 2019. Most recently, Ms. Motala was Category Manager at IPL (part of Walmart). Prior to that, she was Category Buying Manager for three major retailers: Morrisons, Waitrose and Asda, and was Business Unit Manager at World Flowers. Ms. Motala completed a BSc (Hons) (1st Class) degree in Business Management from South Bank University, London.
Greg Mills – Non-Executive Chairman and Director
Mr. Mills joined our board of directors in June 2019. Mr. Mills has 34 years of experience in capital markets, including 20 years with RBC Dominion Securities Inc. Mr. Mills has extensive leadership experience, having served as managing director of RBC Capital Markets’ Global Equities division and on RBC Capital Markets’ Spending and Global Risk committees. Mr. Mills is currently a director of RISE Life Sciences Corp. and was previously a director of RBC USA Holdco Corporation. Mr. Mills holds a Bachelor of Science degree in geology from the University of Windsor.
52
Mr. Hellard joined our board of directors in January 2018 and served as Executive Chairman from January 2018 to January 2020. Mr. Hellard has founded various companies. In 1996, he founded Critical Mass, a digital marketing agency based in Calgary, Alberta. From 2009 to 2010, Mr. Hellard was Managing Partner and co-owner of the Calgary Stampeders Football Club. In 2012, he founded AppColony, a mobile software creator, where he continues to work today as Managing Partner. Mr. Hellard holds a bachelor’s degree in education from the University of Calgary. Mr. Hellard is the father of our Chief Marketing and Product Officer.
Gregory Turnbull – Director
Mr. Turnbull joined our board of directors in October 2018. Mr. Turnbull is a former partner in the Calgary office of McCarthy Tétrault LLP. He has worked as a lawyer since 1980, having held a variety of roles with firms including Gowlings LLP, Donahue LLP and MacKimmie Matthews. In addition to being a director of the Company, Mr. Turnbull is a director of Storm Resources, TargetSleeping Giant Capital and 420 Investments.Corporation. Throughout his career, Mr. Turnbull has served as an officer or director of many other public and private companies. He is a member of the Law Society of Alberta, the Canadian Bar Association and the Calgary Bar Association. He holds a Bachelor of Arts degree (with honors) from Queen’s University and a Bachelor of Law degree from the University of Toronto. He is chair of the board of Alberta health Services and has also previously been chair of the Calgary Zoo.
Elizabeth Cannon – Director
Ms. Cannon joined our board of directors in July 2019. Since January 2019, Ms. Cannon has been President Emerita and Professor of Geomatics Engineering at the University of Calgary. From July 2010 to December 2018, Ms. Cannon was President and Vice Chancellor of the University of Calgary. Ms. Cannon serves on the board of Mancal Corporation. She holds a Bachelor of Applied Science degree in mathematics from Acadia University, as well as Bachelor of Science, Master of Science and Doctor of Philosophy degrees in geomatics engineering from the University of Calgary.
Bryan D. Pinney – Director
Mr. Pinney joined our board of directors in December 2019. BryanMr. Pinney was a partner with Deloitte between 2002 and 2015. He served as Calgary Managing Partner from 2002 through 2007, as National Managing Partner of Audit & Assurance from 2007 to 2010, and Vice-Chair until 2015. Prior to joining Deloitte, BryanMr. Pinney was a partner with Andersen LLP and served as Calgary Managing Partner from 1991 through May of 2002. BryanMr. Pinney is currently a Board Member with TransAlta Corporation, serving on their Audit and HR Compensation Committees. He is also the lead Board Director for North American Energy Partners Inc. and a Board Director on a Hong Kong listed oil and gas company, Persta Resources Inc. Previously, BryanMr. Pinney served as Chair of the Board of Governors of Mount Royal University and on numerous other non-profit boards. He is also a director on one private company. He is a Fellow of the Institute of Chartered Accountants, a Chartered Business Valuator and is a graduate of the Ivey Business School at the University of Western Ontario with an honours degree in Business Administration. He is also a graduate of the Canadian Institute of Corporate Directors.
Lori Ell – Director
Ms. Ell joined our board of directors in July 2021. Ms. Ell has over 25 years of broad-based executive experience working with multi-billion dollar, start up, and midmarket companies in diverse industries including food manufacturing and technology. Her most recent position is President of Growing Ideas, a business consulting practice located in Calgary, Alberta. Ms. Ell sits on the board of directors of the Sawridge Group. She is a director on two Canadian Federal Departmental Audit Committees – Crown-Indigenous Relations and Northern Affairs Canada and Indigenous Services Canada. Previously, Ms. Ell served as chair of the board of AgJunction Inc., where she previously held interim president and chief executive officer roles. Ms. Ell has also served on a number of other retail and food processing boards. From 2004 to 2012, Ms. Ell was the President of Agristar Inc., an agri-food manufacturing company. Prior thereto, Ms. Ell was Chief Financial Officer for Quortech Solutions Ltd. a technology company. Ms. Ell is a Certified Public Accountant, holds a Bachelor or Management degree and holds an ICD.D designation from the Institute of Corporate Directors.
Overview
In order to succeed in the highly competitive and evolving market in which we operate, we need to attract, retain and motivate a highly talented executive team. Our executive compensation program is designed to achieve the following objectives:
• | provide compensation opportunities in order to attract and retain talented, high-performing and experienced executive officers, whose knowledge, skills and performance are critical to our success; |
provide compensation opportunities in order to attract and retain talented, high-performing and experienced executive officers, whose knowledge, skills and performance are critical to our success;
• | motivate our executive team to achieve our strategic business and financial objectives; |
• | align the interests of our executive officers with those of our shareholders by tying a meaningful portion of compensation directly to the long-term value and growth of our business; and |
54
motivate our executive team to achieve our strategic business and financial objectives;
• | provide incentives that encourage appropriate levels of risk-taking by our executive team. |
align the interests of our executive officers with those of our shareholders by tying a meaningful portion of compensation directly to the long-term value and growth of our business; and
provide incentives that encourage appropriate levels of risk-taking by our executive team.
We currently offer our executive officers, including our NEOs’NEOs, cash compensation in the form of base salary and annual short-term and long-term incentives that will reward participants for the achievement of pre-established corporate, team and individual goals and
53
objectives. From time to time, our board of directors may also grant discretionary cash bonuses to our executives to reward them for exemplary performance. Long-term annual incentives may consist of stock options, performance share units (“PSUs”) and/or restricted share units (“RSUs”).
Our compensation philosophy is to motivate our employees to participate directly in the value that their efforts create for shareholders because our employees are also shareholders. We believe that equity-based compensation awards motivate our executive officers to achieve our strategic business and financial objectives, and also align their interests with the long-term interests of our shareholders.
We continue to evaluate our compensation philosophy and compensation program on an ongoing basis to ensure that we are providing competitive compensation opportunities for our executive team as a publicly-tradedpublicly traded company in this evolving industry. As part of the annual compensation review process, we expect to be guided by the philosophy and objectives outlined above, as well as other factors whichthat may become relevant.
Base Salary
Base salary is provided as a fixed source of compensation for our executive officers. Base salaries are determined on an individual basis, taking into account the scope of the executive officer’s role, responsibilities, expertise and prior experience. Base salaries for our executive officers, including our NEOs, are expected to be reviewed annually by the board of directors and may be adjusted based on the executive officer’s success in meeting or exceeding individual objectives, as well as to maintain market competitiveness. In addition, base salaries can be adjusted by the board of directors throughout the year to reflect promotions or other changes in the scope or breadth of an executive officer’s role or responsibilities.
Short-Term Annual Cash Incentive
Our short-term annual cash incentive plan is designed to reward the achievement of pre-determined corporate, team and personal goals and objectives over the ensuing year, with the intention of aligning compensation with corporate strategies. Annual incentive targets under the plan may be set as a percentage of the relevant executive officer’s base salary and payout of the annual cash incentive (if any) are linked to the achievement of corporate, team and personal performance. In order to further increase alignment with shareholders, executives and employees may also have the ability to elect to receive short-term cash incentive payments in the form of RSUs.
Long-Term Equity Incentives
Stock Option Plan and Restricted and Performance Share Unit Plan
The Sundial Growers Inc. Stock Option Plan (the “Option Plan”) and Sundial Growers Inc. Restricted and Performance Share Unit Plan (the “RSU Plan”) each providesprovide eligible participants with compensation opportunities that will support the achievement of the Company’s performance objectives, align the interests of eligible participants with those of the Company’s shareholders, and attract, retain and motivate eligible participants critical to the long termlong-term success of the Company and its subsidiaries.
Benefit Plans
We provide our executive officers, including our NEOs, with life, medical, dental and vision insurance programs on the same basis as other employees, or an allowance to purchase individual benefit and insurance coverage. We offer these benefits consistent with local market practice.
Perquisites
Other than living expense allowances provided for in the employment agreements for our former Chief Executive Officer and former Executive Chairman, weWe do not offer significant perquisites as part of our compensation program.
Executive Share Ownership Guidelines
Our executive share ownership guidelines are intended to further align the interests of our executive officers with those of our shareholders. The ownership guidelines establish minimum equity ownership levels for executive officers based on a multiple of their base salary and their level of seniority. Executive officers are expected to meet the prescribed ownership levels within five years of the later of our initial offering and the date of their appointment to an executive position.
5455
The following table shows the expected ownership guideline for the executive officers:
|
|
Level
| Base Salary
|
Chief Executive Officer | 3x |
Other Executive Officers | 2x |
Summary Compensation Table
Our NEOsnamed executive officers (“NEOs”) for the fiscal year ended December 31, 20192021 were our former Chief Executive Officer, Torsten Kuenzlen,Zachary George, Chief Financial Officer, James Keough, former Executive Chairman, Edward Hellard, President and Chief Operating Officer, Andrew Stordeur, and Chief Marketing and ProductStrategy Officer Ryan Hellard. For the fiscal year ended December 31, 2019,2021, the aggregate compensation and benefits in kind accrued or paid to our then serving executive officers for services in all capacities was $19,282,528,$7,256,963, and the aggregate compensation paid to each of our NEOs is set forth below.below:
|
|
|
|
|
|
|
| |||
Name and Principal Position
| Year
| Salary(1)
| Share-
| Option-
| Annual
| All Other
| Total
| |||
Zachary George Chief Executive Officer and Director | 2021 | $500,000 | $4,574,520 | $— | $250,000 | $45,369 | $5,369,889 | |||
|
|
|
|
|
|
|
| |||
James Keough Chief Financial Officer | 2021 | $321,875 | $247,787 | $— | $100,000 | $32,869 | $702,531 | |||
|
|
|
|
|
|
|
| |||
Andrew Stordeur President and Chief Operating Officer | 2021 | $400,000 | $240,162 | $— | $— | $46,715 | $686,877 | |||
|
|
|
|
|
|
|
| |||
Ryan Hellard Chief Strategy Officer | 2021 | $250,000 | $196,704 | $— | $25,000 | $25,962 | $497,666 |
|
|
|
|
|
|
|
|
Name and Principal Position
| Year
| Salary(1)
| Share-
| Option-
| Annual
| All Other
| Total
|
Zachary George(10) Chief Executive Officer and Director | 2019 | — | — | — | — | — | — |
|
|
|
|
|
|
|
|
Former Chief Executive Officer | 2019 | $358,125 | — | $6,517,736 | — | $882,768(6) | $7,758,629 |
|
|
|
|
|
|
|
|
James Keough Chief Financial Officer | 2019 | $191,667 | — | $1,455,856 | $50,000 | — | $1,697,523 |
|
|
|
|
|
|
|
|
Edward Hellard(5) Former Executive Chairman | 2019 | $272,977(7) | — | $5,501,658 | $364,575 | $218,425(8) | $6,357,635 |
|
|
|
|
|
|
|
|
Andrew Stordeur President and Chief Operating Officer | 2019 | $254,167 | — | $1,256,129 | — | $446,143(9) | $1,956,438 |
|
|
|
|
|
|
|
|
Ryan Hellard Chief Marketing and Product Officer | 2019 | $206,250 | — | $1,256,052 | $50,000 | $— | $1,512,302 |
Notes:
| (1) | Represents the base salary paid in Fiscal |
| (2) |
|
| (3) |
|
| (4) | None of our NEOs |
|
|
|
|
|
|
|
|
|
|
The table below shows the incremental payments that would be made to our NEOs under the terms of their employment agreements upon the occurrence of certain events.
|
|
|
|
|
|
Name and Principal
| Event
| Severance(1)
| Option-
| Other
| Total(1)
|
Zachary George | Termination without cause | $1,400,000 | — | $21,000 | $1,421,000 |
Chief Executive Officer and Director | Termination and change of control | $1,400,000 | — | $21,000 | $1,421,000 |
|
|
|
|
|
|
James Keough | Termination without cause | $650,000 | — | $9,750 | $659,750 |
Chief Financial Officer | Termination and change of control | $325,000 | — | $9,750 | $334,750 |
|
|
|
|
|
|
Andrew Stordeur | Termination without cause | $800,000 | — | $12,000 | $812,000 |
President and Chief Operating Officer | Termination and change of control | $800,000 | — | $12,000 | $812,000 |
|
|
|
|
|
|
Ryan Hellard | Termination without cause | $500,000 | — | $7,500 | $507,500 |
Chief Strategy Officer | Termination and change of control | $500,000 | — | $7,500 | $507,500 |
|
|
|
|
|
|
55
| Event
| Severance
| Option-
| Other
| Total
|
Termination without cause | $377,500 | $1,049,600 | $11,325 | $1,438,425 | |
Former Chief Executive Officer(2) | |||||
|
|
|
|
|
|
James Keough | Termination without cause | $500,000 | — | $7,500 | $507,500 |
Chief Financial Officer | Termination and change of control | $500,000 | — | $7,500 | $507,500 |
|
|
|
|
|
|
Edward Hellard | Termination without cause | $377,450 | — | $11,324 | $388,774 |
Former Executive Chairman(2) | |||||
|
|
|
|
|
|
Andrew Stordeur President and Chief Operating Officer | Termination without cause | $600,000 | — | $9,000 | $609,000 |
Termination and change of control | $600,000 | — | $9,000 | $609,000 | |
|
|
|
|
|
|
Ryan Hellard | Termination without cause | $500,000 | — | $7,500 | $507,500 |
Chief Marketing and Product Officer | Termination and change of control | $500,000 | — | $7,500 | $507,500 |
Notes:
| (1) |
|
| (2) |
|
Outstanding Option-Based Awards and Share-Based Awards and Option-Based Awards
The following table sets out information on the outstanding warrants and other option-based awards held by each of our NEOs as at December 31, 2019. None of our NEOs hold any share-based awards.
2021.
Name
| Number of
| Exercise (USD)
| Expiration date
| Value of
|
|
| $
|
| $
—
|
|
|
|
|
|
James Keough Chief Financial Officer | 80,000 108,000 160,000 75,000 | $2.97 2.97 6.25 0.83 | August 14, 2023 August 1, 2024 June 15, 2027 |
|
|
| $
|
|
— — — |
|
|
|
|
|
56
|
|
|
|
|
President and Chief Operating Officer | 38,400 38,400 115,200 160,000 100,000 192,000 192,000 | $0.63 0.63 0.63 6.25 0.83 0.63 3.13 | March 6, 2023 March 6, 2024 August 1, 2024 January 11, 2027 May 27, 2030 5 years from vest date 5 years from vest date | $
—
— — — |
|
|
|
|
|
Ryan Hellard Chief | 38,400 38,400 115,200 160,000 100,000 192,000 192,000 | $0.63 0.63 0.63 6.25 0.83 0.63 3.13 | March 1, 2023 March 1, 2024 August 1, 2024 January 11, 2027 May 27, 2030 5 years from vest date 5 years from vest date | $
—
— — — |
Notes:
| (1) |
|
The following table sets out information on the outstanding share-based awards held by each of our NEOs as at December 31, 2021.
Name | Number of | Value of share-based awards that have not vested(2) | Value of | ||||
Zachary George Chief Executive Officer | RSUs:4,000,000 DSUs:— | $3,049,680 — | $— 91,153 | ||||
James Keough Chief Financial Officer | RSUs:241,667 | $193,871 | $— | ||||
Andrew Stordeur President and Chief Operating Officer | RSUs:310,000 | $274,827 | $— | ||||
Ryan Hellard Chief Strategy Officer | RSUs:255,334 | $226,736 | $— |
Notes:
(1) | All monetary amounts are in CAD$ unless otherwise specified. |
(2) | The value of the share-based awards that have not yet vested were calculated by multiplying the total number of units that have not yet vested by the closing price of the Company’s common shares on the trading day immediately preceding the grant date. |
(3) | The value of the share-based awards that have not been distributed were calculated by multiplying the total number of units that have not been distributed by the closing price of the Company’s common shares on the trading day immediately preceding the grant date. |
57
Incentive Plan Awards – Value Expected to be Vested or Earned During the Year
The following table sets out, for each of our NEOs, the value of the option-based awards and share-based awards that vested in accordance with their terms as of December 31, 2019. As of December 31, 2019, none of our NEOs hold any share-based awards.2021.
|
| |
Name and Principal Position
| Option-Based Awards
| Share-Based Awards |
| $ | $3,708,357 |
|
| |
James Keough Chief Financial Officer | $ | $253,320 |
| ||
|
| |
|
| |
Andrew Stordeur President and Chief Operating Officer | $ | $194,773 |
|
| |
Ryan Hellard Chief | $ | $161,166 |
Notes:
| (1) | The |
Management Agreements
Employment Agreements
The Company has entered into employment agreements with each of our NEOs. The material terms of the employment agreements are discussed below.
Zachary George, Chief Executive Officer
The Company may terminate Mr. George at any time, without cause, and the Company will be required to provide him with his accrued but unpaid annual base salary, pay for accrued and unused vacation pay and business expenses up to the termination date (the “Accrued Obligations”),
57
plus (i) termination notice of one (1) yeartwo years (which may be provided as pay in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) any unvested stock options or restricted share units will immediately vest on the termination date. The receipt of the separation package is conditioned on Mr. George’s execution of a release of claims.
Pursuant to Mr. George’s employment agreement, if a change of control occurs, and his employment with the Company is subsequently or contemporaneously terminated by the Company or its successor, Mr. George will be entitled to receive, within thirty (30) days after such termination, a lump sum payment equal to (i) the Accrued Obligations, (ii) one timetwo times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits.
Mr. George’s employment agreement also contains a customary confidentiality covenant and certain covenants that will continue to apply following the termination of his employment, including non-competition and non-solicitation provisions which are in effect during Mr. George’s employment and for the twelve (12) months following the termination of his employment (collectively, the “Restrictive Covenants”).
James Keough, Chief Financial Officer
The Company may terminate Mr. Keough at any time without cause and the Company will be required to provide him with his accrued but unpaid annual base salary, pay for accrued and unused vacation and business expenses up to the cessation date (the “Accrued Obligations”),Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), and (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to Mr. Keough will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Keough’s execution of a release of claims.
Pursuant to Mr. Keough’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Keough will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) one timesyear of his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits.
Mr. Keough’s employment agreement also contains the Restrictive Covenants.
58
Andrew Stordeur, President and Chief Operating Officer, former President – Canada
The Company may terminate Mr. Stordeur at any time without cause and the Company will be required to provide him with his Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) all of his outstanding performance warrants will immediately vest on the cessation date. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to Mr. Stordeur will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Stordeur’s execution of a release of claims.
Pursuant to Mr. Stordeur’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Stordeur will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) two times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits, and all of his outstanding performance warrants will immediately vest on the cessation date.
Mr. Stordeur’s employment agreement also contains the Restrictive Covenants, except that if Mr. Kuenzlen ceases to be employed by the Company at the same time or within the preceding 30 days of Mr. Stordeur’s cessation of employment, then Mr. Stordeur will not be subject to a non-competition restriction.Covenants.
Ryan Hellard, Chief Marketing and ProductStrategy Officer
The Company may terminate Mr. Hellard at any time without cause and the Company will be required to provide him with his Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) all of his outstanding performance warrants will immediately vest on the cessation date. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to
58
Mr. Hellard will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Hellard’s execution of a release of claims.
Pursuant to Mr. Hellard’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Hellard will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) two times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits, and all of his outstanding performance warrants will immediately vest on the cessation date.
Edward Hellard, Former Executive Chairman
Mr. Hellard’s employment agreement is for a three-year fixed term, commencing as of April 1, 2019 (subject to extension or earlier termination). On January 29, 2020, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors. Negotiations regarding settlement payments pursuant to Mr. Hellard’s resignation as Executive Chairman are ongoing and the receipt of his separation package is conditioned on Mr. Helland’s execution of a release of claims.
Mr. Hellard’s employment agreement also contains the Restrictive Covenants.
Torsten Kuenzlen, Former Chief Executive Officer
Mr. Kuenzlen’s employment agreement was for a three-year fixed term commencing as of April 1, 2019 (subject to extension or earlier termination). On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. Negotiations regarding settlement payments pursuant to Mr. Kuenzlen’s resignation are ongoing and the receipt of his separation package is conditioned on Mr. Kuenzlen’s execution of a release of claims.
Mr. Kuenzlen’s employment agreement also contains the Restrictive Covenants.
Our board of directors, on the recommendation of our compensation committee, is responsible for reviewing and approving any changes to the directors’ compensation arrangements. The aggregate of compensation and benefits in kind, accrued or paid to our directors in the year ended December 31, 2021 for services in all capacities was $350,546.
In consideration for serving on our board of directors, each director, other than directors who are employees of the Company (the “Excluded Directors”), is paid an annual cash retainer of $75,000. In addition, for serving during the Company’s first year as a publicly traded company, Messrs Turnbull and Mills and Ms. Cannon each received $175,000 payable in deferred share units at the IPO price in equal installments on September 30, 2019, December 31, 2019, March 31, 2020 and June 30, 2020. Mr, Tamkee received $43,750 in deferred share units at the IPO price prior to his resignation from the board effective December 14, 2019. Upon joining the board on November 27, 2019, and prior to him becoming our Chief Executive Officer, Mr. George became entitled to receive $350,000 during the time he serves as Chair of the Operating and Capital Committee and 250,000 deferred share units in equal installments on December 1, 2019, March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022. Upon joining the board on December 16, 2019, Mr. Pinney iswas entitled to $175,000 in deferred share units payable in equal installments on March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. The number of deferred share units issuable are determined by the installment payment divided by the fair market value of our common shares aton each installment date.
If a change of control occurs, all of these equity grants (except those granted to Mr. Mills and Mr. Turnbull) will immediately vest.
In addition, to reflect the additional workload required in respect of special projects performed, Mr. George was entitled to receive 500,000 warrants (subsequently amended to an entitlement to 500,000 stock options in accordance with the Company Stock Option Plan, in equal installments on, , March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022 and June 30, 2022. The unvested portion of Mr. George’s compensation as a director (if unvested)in the form of stock options was terminatedcancelled for no consideration when he became Chief Executive Officer on January 29, 2020. Since becoming our Chief Executive Officer, Mr. George has not received additional compensation for his director services.
In addition, to reflect the additional workload and responsibilities of his position as Non-Executive Chairman of our board of directors, GregMr. Mills iswas entitled to receive $600,000 during our first year as a publicly traded company payable in deferred share units at the IPO price comprised of quarterly installments of $150,000 which were paidin equal on September 30, 2019, and December 31, 2019, with the remaining installments payable on March 31, 2020, and June 30, 2020.2020 (the “IPO DSUs”). In addition,
59
Mr. Mills was issued 720,000 warrants on July 1, 2019 to purchase our common shares, with an exercise price of $6.25 per warrant. Under the terms of Mr. Mills’ director services agreement, those warrants vest in three equal annual installments in the event Mr. Mills assumes the position of Executive Chairman and will expire five years from the vesting date; however, if Mr. Mills does not assume the position of Executive Chairman
59
by December 31, 2021, then all of such warrants will expire. In addition, if Mr. Mills were to assume the position of Executive Chairman, he would receive an annual salary of $500,000 payable quarterly in equal installments. While Mr. Mills’ director services agreement contemplates that he may assume the position of Executive Chairman as early as July 2020. Although,2020, upon the resignation of our former Executive Chairman, Mr.Edward Hellard, resigned from his position on January 29, 2020, our board of directors did not agree to nominate Mr. Mills, and Mr. Mills has not agreed to nominate Mr. Mills, nor has Mr. Mills agreed to serve in such positionas our Executive Chairman as of the date of this Annual Report.
Furthermore, on July 1, 2019, Mr. Mills was issued 80,000 warrants to purchase 80,000 of our common shares, with an exercise price of $7.50 per warrant, which vest if, during the term of Mr. Mills’ director services agreement, the equity market capitalization value of the Company (as calculated in accordance with the agreement) exceeds $5.5 billion. These warrants expire three years following the vesting date.
In addition, on May 28, 2020, to reflect the additional workload and responsibilities of our board of directors in recognition for their contributions in the restructuring of the Company, and the closing of the following transactions: (i) the sale of Bridge Farm, (ii) a new Credit Agreement with senior lenders, (iii) the issuance of a new second lien security to SAF, and (iv) a new capital infusion of at least $10 million, Mr. Mills received 600,000 deferred share units with an aggregate value of $710,222, Mr. Turnbull received 200,000 deferred share units with an aggregate value of $236,741, Ms. Cannon received 200,000 deferred share units with an aggregate value of $236,741, and Mr. Pinney received 85,000 deferred share units with an aggregate value of $100,615. With respect to all of these deferred share units, half of each deferred share unit granted were vested as of the time of grant, and the remaining half became vested as of December 31, 2020.
In addition, on May 28, 2020, for the balance of the 2020 calendar year and each successive year until otherwise determined by our board of directors, the independent non-management directors, other than the chair of our board of directors, will receive annual cash compensation of $75,000 payable in quarterly instalments, and will receive $225,000 in compensation to be paid in the form of deferred share units. The chair of our board will receive annual cash compensation of $125,000 payable in quarterly instalments and $575,000 in compensation to be paid in the form of deferred share units. In accordance with the May 28, 2020 board resolution, Messrs. Pinney and Turnbull and Ms. Cannon each received $225,000 in deferred share units in equal instalments on June 15, 2020, September 15, 2020, December 15, 2020, March 15, 2021, and June 15, 2021. Mr. Mills received $575,000 in deferred share units in equal instalments on June 15, 2020, September 15, 2020, December 15, 2020, March 15, 2021, and June 15, 2021.
If a change of control occurs, Mr. Mills will be entitled to receive any unpaid portion of the annual cash retainer for the calendar year in which the change of control occurs and any unpaid portion of the $600,000 fee payable in deferred share units referred to above.IPO DSUs. In addition, if a change of control occurs, all outstanding warrants held by Mr. Mills and Mr. Turnbull will immediately vest.
In accordance with the May 28, 2020 board resolution, Messrs Pinney and Turnbull each received $225,000 in deferred share units and $75,000 cash compensation for the 2021 calendar year, Ms. Cannon received $225,000 in deferred share units and $75,000 cash compensation prorated for her time served on the board from January 1, 2021 to July 7, 2021, Ms. Ell received $225,000 in deferred share units and $75,000 cash compensation prorated for her time served on the board from July 7, 2021 to December 31, 2021. Mr. Mills received $575,000 in deferred share units and $125,000 cash compensation for the 2021 calendar year.
In addition, on February 16, 2021, a discretionary DSU allocation was granted. Mr. Mills received 500,000 deferred share units with an aggregate value of $1,321,944, Mr. Turnbull, Ms. Cannon, and Mr. Pinney each received 250,000 deferred share units with an aggregate value of $660,972. With respect to all of these deferred share units, half of each deferred share unit granted vested as of June 15, 2021, and the remaining half vested as of December 15, 2021.
All directors will be reimbursed for their reasonable out-of-pocket expenses incurred while serving as directors.
The aggregate of compensation and benefits in kind, accrued or paid to our directors in the year ended December 31, 2019 for services in all capacities was $187,532 (2018 - $230,580).
Director Share Ownership Guidelines
We have director share ownership guidelines for directors (other than Excluded Directors) to further align the interests of such directors with those of our shareholders. The ownership guidelines have established minimum equity ownership levels for each of our directors, other than Excluded Directors, based on a multiple of their annual retainer. Such directorsDirectors subject to the ownership guidelines are expected to meet the prescribed ownership levels within five years of the later of (i) the completion of the IPO and (ii) the date of their appointment to the board of directors. Common shares and other equity-based awards will be included in determining an individual’s equity ownership value. The expected ownership guideline for these directors is 3xthree times their annual retainer.
Composition of our Board of Directors
Under our amended articles of incorporation, our board of directors consists of a minimum of one and a maximum of 15 directors as determined from time to time by the directors. Our board of directors is currently comprised of sixfive directors, and under the ABCA, as a reporting issuer, we must have no fewer than three directors. Under the ABCA, a director may be removed with or without cause by
60
a resolution passed by a majority of the votes cast by shareholders present in person or by proxy at a meeting and who are entitled to vote. The directors are appointed at the annual general meeting of shareholders and the term of office for each of the directors expires at the time of our next annual shareholders meeting. Our articles of incorporation provide that, between annual general meetings of our shareholders, the directors may appoint one or more additional directors, but the number of additional directors may not at any time exceed one-third of the number of directors who held office at the expiration of the last meeting of our shareholders. Under the ABCA, at least one quarter of our directors must be resident Canadians as defined in the ABCA.
Majority Voting Policy
We have a majority voting policy to the effect that a nominee for election as a director of the Company who does not receive a greater number of votes “for” than votes “withheld” with respect to the election of directors by shareholders will be expected to offer to tender his or her resignation to the chairman of our board of directors promptly following the meeting of shareholders at which the director was elected. The nominating and corporate governance committee will consider such offer and make a recommendation to our board of directors about whether to accept it or not. Our board of directors will promptly accept the resignation unless it determines, in consultation with the nominating and corporate governance committee, that there are exceptional circumstances that should delay the acceptance of the resignation or justify rejecting it. Our board of directors will make its decision and announce it in a press release within 90 days following the meeting of shareholders. A director who tenders a resignation pursuant to our majority voting policy will not participate in any meeting of our board of directors or the nominating and corporate governance committee at which the resignation is considered. Our majority voting policy will not apply for contested meetings at which the number of directors nominated for election is greater than the number of seats available on the board.
60
Director Term Limits and Other Mechanisms of Board Renewal
Our board of directors has not adopted director term limits or other automatic mechanisms of board renewal. Rather than adopting formal term limits, mandatory age-related retirement policies and other mechanisms of board renewal, the nominating and corporate governance committee of our board of directors is developing a skills and competencies matrix for our board of directors as a whole and for individual directors. The nominating and corporate governance committee will also conductconducts a process for the assessment of our board of directors, each committee and each director regarding his or her effectiveness and contribution and will reportreports evaluation results to our board of directors on a regular basis.
Director Independence
Under the Nasdaq Rules, independent directors must comprise a majority of a listed company’s board of directors. For purposes of the Nasdaq Rules, an independent director means a person other than an executive officer or employee of the company who, in the opinion of the board of directors, has no relationship with the company that would interfere with the exercise of independent judgmentjudgement in carrying out the responsibilities of a director. Under National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”), a director is considered to be independent if he or she is independent within the meaning of Section 1.4 of National Instrument 52-110—Audit Committees (“NI 52-110”). Section 1.4 of NI 52-110 generally provides that a director is independent if he or she has no direct or indirect relationship with the issuer which could, in the view of the issuer’s board of directors, be reasonably expected to interfere with the exercise of the director’s independent judgment.judgement.
Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, [ourour board of directors has determined that as of December 31, 2019,2021, Messrs. Mills, Turnbull and Pinney, and Ms. Cannon,Ell, representing four of the sixfive members of our board of directors, are “independent” as that term is defined under the Nasdaq Rules and NI 58-101. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director. As of December 31, 2019, Messrs. Hellard and Kuenzlen were2021, Mr. George was not independent by reason of the fact that Mr. Hellard was our Executive Chairman and Mr. KuenzlenGeorge was our Chief Executive Officer. On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. Mr. Hellard stepped down from his role as Executive Chairman on January 29, 2020 and continues to serve on the Board of Directors.
Certain members of our board of directors are also members of the boards of other public companies. See “—Biographical Information Regarding Our Directors and Executive Officers”. Our board of directors has not adopted a director interlock policy but is keeping informed of other public directorships held by its members.
Mandate of the Board of Directors
Our board of directors is responsible for supervising the management of our business and affairs, including providing guidance and strategic oversight to management. Our board adopted a formal mandate that includes the following:
appointing our Chief Executive Officer;
• | appointing our Chief Executive Officer; |
• | developing the corporate goals and objectives that our Chief Executive Officer is responsible for meeting and reviewing the performance of our Chief Executive Officer against such corporate goals and objectives; |
61
developing the corporate goals and objectives that our Chief Executive Officer is responsible for meeting and reviewing the performance of our Chief Executive Officer against such corporate goals and objectives;
taking steps to satisfy itself as to the integrity of our Chief Executive Officer and other executive officers and that our Chief Executive Officer and other executive officers create a culture of integrity throughout the organization;
• | taking steps to satisfy itself as to the integrity of our Chief Executive Officer and other executive officers and that our Chief Executive Officer and other executive officers create a culture of integrity throughout the organization; |
reviewing and approving our code of conduct and reviewing and monitoring compliance with the code of conduct and our enterprise risk management processes;
• | reviewing and approving our code of conduct and reviewing and monitoring compliance with the code of conduct and our enterprise risk management processes; |
reviewing and approving management’s strategic and business plans and our financial objectives, plans and actions, including significant capital allocations and expenditures; and
• | reviewing and approving management’s strategic and business plans and our financial objectives, plans and actions, including significant capital allocations and expenditures; and |
reviewing and approving material transactions not in the ordinary course of business.
• | reviewing and approving material transactions not in the ordinary course of business. |
Meetings of Independent Directors
Our board of directors holds regularly-scheduledregularly scheduled quarterly meetings as well as ad hoc meetings from time to time. The independent members of our board of directors also meet, as required, without the non-independent directors and members of management before or after each regularly scheduled board meeting.
61
A director who has a material interest in a matter before our board of directors or any committee on which he or she serves is required to disclose such interest as soon as the director becomes aware of it. In situations where a director has a material interest in a matter to be considered by our board of directors or any committee on which he or she serves, such director may be required to absent himself or herself from the meeting while discussions and voting with respect to the matter are taking place. Directors will also be required to comply with the relevant provisions of the ABCA regarding conflicts of interest.
Position Descriptions
Our board of directors has written terms of reference for the chairman which setsset out his or her key responsibilities, including duties relating to determining the frequency, dates and locations of meetings and setting board of directors meeting agendas, chairing board of directors and shareholder meetings and carrying out any other or special assignments or any functions as may be requested by our board of directors or management, as appropriate.
Our board of directors has written terms of reference for each of the committee chairs which setsset out each of the committee chair’s key responsibilities, including duties relating to determining the frequency, dates and locations of meetings and setting committee meeting agendas, chairing committee meetings, reporting to our board of directors and carrying out any other special assignments or any functions as may be requested by our board of directors.
In addition, our board of directors, in conjunction with our Chief Executive Officer, has developed and implemented a written position description for the role of our Chief Executive Officer.
Orientation and Continuing Education
We have implemented an orientation program for new directors under which a new director will meet separately with the chairman of our board of directors, members of the senior executive team and the secretary.
The nominating and corporate governance committee is responsible for coordinating orientation and continuing director development programs relating to the committee’s mandate. The chairman of our board of directors is responsible for overseeing director continuing education designed to maintain or enhance the skills and abilities of our directors and to ensure that their knowledge and understanding of our business remains current.
Code of Conduct
We have adopted a code of conduct applicable to all of our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer, which is a “code of ethics” as defined in section 406(c) of SOX and which is a “code” under NI 58-101. The code of conduct sets out our fundamental values and standards of behavior that are expected from our directors, officers and employees with respect to all aspects of our business. The objective of the code of conduct is to provide guidelines for maintaining our integrity, reputation and honesty with a goal of honoring others’ trust in us at all times as well as to deter wrongdoing and promote (i) honest and ethical behavior and fair dealing by our directors, officers, employees, consultants and contractors, (ii) full, fair, accurate, timely and understandable disclosure in filings with the SEC and other public communications, (iii) compliance with applicable governmental rules and regulations, and (iv) accountability for adherence to the code of conduct and prompt reporting of its violations.
The full text of the code of conduct has been posted on our website at www.sundialcannabis.com.www.sndlgroup.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Annual Report, and the inclusion of our website address in this Annual Report is only for reference. If we make any amendment to the code of conduct or grant any waiver therefrom, whether explicit or implicit, to a director or executive officer, we will disclose the nature of such amendment or waiver on our website to the extent required by, and in accordance with, the rules and regulations of the SEC and the Canadian securities regulatory authorities.
Monitoring Compliance with the Code of Conduct
62
Our nominating and corporate governance committee is responsible for reviewing and evaluating the code of conduct at least annually and recommends any necessary or appropriate changes to our board of directors for consideration. The nominating and corporate governance committee assists our board of directors with the monitoring of compliance with the code of conduct and is responsible for considering any waivers therefrom (other than waivers applicable to members of the nominating and corporate governance committee, which are considered by the audit committee, or waivers applicable to our directors or executive officers, which are subject to review by our board of directors as a whole).
62
Requirement for Directors and Officers to Disclose Interest in a Contract or Transaction
In accordance with the ABCA, each director and officer must disclose the nature and extent of any interest that he or she has in a material contract or material transaction whether made or proposed with us, if the director or officer is a party to the contract or transaction, is a director or an officer or an individual acting in a similar capacity of a party to the contract or transaction or has a material interest in a party to the contract or transaction. Subject to certain limited exceptions under the ABCA, no director may vote on a resolution to approve a material contract or material transaction which is subject to such disclosure requirement.
Benefits upon Termination of Employment
The service contracts with our directors do not provide for any benefits upon termination of employment, other than a “tail” directors and officers insurance policy.
Complaint Reporting
In order to foster a climate of openness and honesty in which any concern or complaint pertaining to a suspected violation of the law, our code of conduct or any of our policies, or any unethical or questionable act or behavior, our code of conduct requires that our employees promptly report the violation or suspected violation. In order to ensure that violations or suspected violations can be reported without fear of retaliation, harassment or an adverse employment consequence, we have adopted a whistleblowing policy which contains procedures that are aimed to facilitate confidential, anonymous submissions of complaints by our directors, officers, employees and others.
Diversity
We believe that having a diverse board of directors can offer a breadth and depth of perspectives that enhance the board’s performance. We value diversity of abilities, experience, perspective, education, gender, background, race and national origin. Recommendations concerning director nominees are based on merit and past performance, as well as expected contribution to the board’s performance and, accordingly, diversity is taken into consideration. As of December 31, 2019,2021, we had one female director, which represents 16%20% of our board.
We similarly believe that having a diverse and inclusive organization overall is beneficial to our success, and we are committed to diversity and inclusion at all levels of our organization to ensure that we attract, retain and promote the brightest and most talented individuals. We have recruited and selected senior management candidates that represent a diversity of business understanding, personal attributes, abilities and experience. Currently, one out of eight of our executive officers is a woman.
We do not currently have a formal policy for the representation of women on the board of directors or senior management of the company. We already take gender and other diversity representation into consideration as part of our overall recruitment and selection process. We have not adopted targets for gender or other diversity representation, in part due to the need to consider a balance of criteria for each individual appointment. We do not believe that quotas or strict rules set out in a formal policy would result in improved identification or selection of the best candidates. Quotas based on specific criteria would limit our ability to ensure that the overall composition of the board of directors and senior management meets the needs of our organization and our shareholders.
The composition of the board of directors is shaped by the selection criteria established by the nominating and corporate governance committee. This is achieved through developing an evergreen list of potential candidates for anticipated board vacancies who fit the committee’s list of evolving selection criteria, ensuring that diversity considerations are taken into account in senior management, monitoring the level of female representation on the board and in senior management positions, continuing to broaden recruiting efforts to attract and interview qualified female candidates, and committing to retention and training to ensure that our most talented employees are promoted from within our organization, all as part of our overall recruitment and selection process to fill board or senior management positions as the need arises.
Committees of the Board of Directors
We have an audit committee, a compensation committee, a nominating and corporate governance committee, and an operations and capital committee with each committee having a written charter.
63
Our audit committee is comprised of Greg Mills and Elizabeth Cannon,Lori Ell, and chaired by Bryan Pinney. Our board of directors has determined that each of Greg Mills, Elizabeth CannonLori Ell and Bryan Pinney is financially literate and meets the independence requirements for directors, including the heightened independence standards for members of the audit committee under Rule 10A-3 under the Exchange Act and NI 52-110. Our board of directors has determined that Bryan Pinney is “financially sophisticated” within the meaning of the Nasdaq Rules, “financially literate” within the meaning of NI 52-110, and a “financial expert” as defined by Rule 10A-3 under the Exchange Act. For a description of the education and experience of each member of the audit committee, see “—Biographical Information Regarding Our Directors and Executive Officers”.
Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the audit committee, consistent with the rules of the Nasdaq, the SEC and NI 52-110 and our audit committee reviews the charter annually. The principal purpose of our audit committee is to oversee the accounting and financial reporting processes and audits of the Company and to assist our board of directors in discharging its oversight of:
•the quality and integrity of our financial statements and related information;
•the independence, qualifications, appointment and performance of our external auditor;
•our disclosure controls and procedures, internal control over financial reporting and management’s responsibility for assessing and reporting on the effectiveness of such controls;
•our compliance with applicable legal and regulatory requirements; and
•our enterprise risk management processes.
• | the quality and integrity of our financial statements and related information; |
• | the independence, qualifications, appointment and performance of our external auditor; |
• | our disclosure controls and procedures, internal control over financial reporting and management’s responsibility for assessing and reporting on the effectiveness of such controls; |
• | our compliance with applicable legal and regulatory requirements; and |
• | our enterprise risk management processes. |
Our audit committee is directly responsible for the appointment, retention and compensation of external auditors and for considering their independence and any potential conflicts of interest. Our audit committee has access to all of our books, records, facilities and personnel and is able to request any information about us as it may deem appropriate. It also has the authority in its sole discretion and at our expense, to retain and set the compensation of outside legal, accounting or other advisors as necessary to assist in the performance of its duties and responsibilities.
Our audit committee also reviews our policies and procedures for reviewing and approving or ratifying related-party transactions and will beis responsible for reviewing and approving or ratifying all related-party transactions.
Compensation Committee
Our compensation committee is comprised of Elizabeth CannonLori Ell and Bryan Pinney and is chaired by Greg Mills. Under SEC and the Nasdaq Rules, there are heightened independence standards for members of the compensation committee. Our board of directors has determined that each of Elizabeth Cannon,Lori Ell, Bryan Pinney and Greg Mills meet this heightened standard and are also independent for purposes of NI 58-101. For a description of the background and experience of each member of our compensation committee, see “—Biographical Information Regarding Our Directors and Executive Officers”.
Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the compensation committee consistent with the rules of the Nasdaq, the SEC and the guidance of the Canadian securities regulatory authorities and our compensation committee will reviewreviews the charter annually. The compensation committee’s purpose is to assist the board in its oversight of executive compensation, management development and succession, director compensation and executive compensation disclosure. The principal responsibilities and duties of the compensation committee include:
• | reviewing at least annually our executive compensation plans; |
in the absence of the Chief Executive Officer, evaluating at least once a year our Chief Executive Officer’s performance in light of the goals and objectives established by our board of directors and, based on such evaluation, providing recommendations to our board of directors regarding the Chief Executive Officer’s annual compensation;
reviewing on an annual basis the evaluation process and compensation structure for our executive officers and, in consultation with our Chief Executive Officer, reviewing the performance of the other executive officers in order to make recommendations to our board of directors with respect to the compensation for such officers; and
64
• | reviewing on an annual basis the evaluation process and compensation structure for our executive officers and, in consultation with our Chief Executive Officer, reviewing the performance of the other executive officers in order to make recommendations to our board of directors with respect to the compensation for such officers; and |
• | reviewing and, if appropriate, recommending to our board of directors the approval of any adoption, amendment and termination of our incentive and equity-based incentive compensation plans (and the aggregate number of shares to be reserved for issuance thereunder), and overseeing their administration and discharging any duties imposed on the compensation committee by any of those plans. |
Further particulars of the process by which compensation for our executive officers is and will be determined are provided under the heading “Executive Compensation”.
64
Our compensation committee also has the authority in its sole discretion and at our expense, to appoint, compensate and oversee any compensation consultant, legal counsel or other adviser, upon taking into consideration various factors which could impact such consultant’s, counsel’s or adviser’s independence.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee is comprised of Bryan Pinney and Elizabeth Cannon,Lori Ell, and chaired by Gregory Turnbull, each of whom is independent for purposes of NI 58-101 and the Nasdaq Rules.
Our board of directors has establishestablished a written charter setting forth the purpose, composition, authority and responsibility of our nominating and corporate governance committee. The nominating and corporate governance committee’s purpose is to assist our board of directors in:
identifying individuals qualified to become members of our board of directors;
• | identifying individuals qualified to become members of our board of directors; |
selecting, or recommending that our board of directors select, director nominees for the next annual meeting of shareholders and determining the composition of our board of directors and its committees;
• | selecting, or recommending that our board of directors select, director nominees for the next annual meeting of shareholders and determining the composition of our board of directors and its committees; |
developing and overseeing a process to assess our board of directors, the chairman of the board of directors, the committees of the board of directors, the chairs of the committees, individual directors and management; and
• | developing and overseeing a process to assess our board of directors, the chairman of the board of directors, the committees of the board of directors, the chairs of the committees, individual directors and management; and |
developing and implementing our corporate governance guidelines.
• | developing and implementing our corporate governance guidelines. |
In identifying new candidates for our board of directors, the nominating and corporate governance committee considers what competencies and skills our board of directors, as a whole, should possess and assess what competencies and skills each existing director possesses, considering our board of directors as a group, and the personality and other qualities of each director, as these may ultimately determine the boardroom dynamic.
It is the responsibility of the nominating and corporate governance committee to regularly evaluate the overall efficiency of our board of directors and our chairman and all board committees and their chairs. As part of its mandate, the nominating and corporate governance committee conducts the process for the assessment of our board of directors, each committee and each director regarding his, her or its effectiveness and contribution, and report evaluation results to our board of directors on a regular basis..
Operations and Capital Committee
Our operations and capital committee is comprised of Greg Turnbull and Bryan Pinney, and is chaired by Zachary George. Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the operations and capital committee which the operations and capital committee will review annually. The operations and capital committee’s purpose is to assist the board in its oversight of the Company’s financial strategy and capital structure. The principal responsibilities and duties of the operations and capital committee include:
optimizing the Company’s debt to equity ratio and assessing current, and future, requirements for additional capital;
approving the Company’s negotiations with current and future secured lenders, unsecured lenders and other creditors and other financial advisors, including investment banks;
reviewing the Company’s financial efficiencies including ongoing review of its cost structure and cost controls; and
reviewing and, if appropriate, recommending to the board of directors the adoption or implementation of any of its recommendations.
Our operations and capital committee will also have the authority in its sole discretion and at our expense, to retain persons having special expertise and/or obtain independent professional advice to assist in fulfilling its responsibilities.
65
Mergers and Acquisitions Committee
Our mergers and acquisitions committee is comprised of Greg Mills and Zachary George, and is chaired by Edward Hellard. Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the mergers and acquisitions committee which the mergers and acquisitions committee will review annually. The mergers and acquisitions committee’s purpose is to assist the board in its oversight of the Company’s strategy regarding mergers, acquisitions, investments and dispositions. The principal responsibilities and duties of the mergers and acquisition committee include:
approving the Company’s proposed mergers, acquisitions, investments and dispositions of material assets or a material portion of any business (a “Material Transaction”), including assessing risks to the Company in connection with Material Transactions, and approving and/or making recommendations to the board to approve Material Transactions, as appropriate;
assisting the Company with post-closing analysis of Material Transactions; and
reviewing and, if appropriate, making recommendations to the board regarding the adoption or implementation of any of its recommendations.
Our mergers and acquisitions committee also has the authority in its sole discretion and at our expense, to retain persons having special expertise and/or obtain independent professional advice to assist in fulfilling its responsibilities.
basis.
As of December 31, 2019,2021, we employed 1,064580 total employees, 868comprised of whom were184 full-time employees and 15 were engaged contractors located in Canada, comprised of 747 employees in facility operations and logistics roles, 93 employees in general, administrative and support roles, 28 employees in sales and marketing roles, and 196 employees located in the United Kingdom and employed by Bridge Farm. In 2020, the Company undertook headcount reductions as part of its business optimization initiatives.396 hourly employees.
We consider relations with our employees to be good and have never experienced a work stoppage. None of our employees are represented by a labor union or subject to a collective bargaining agreement.
See “Item 7A Major Shareholders and Related Party Transactions—Major Shareholders".
See “Item 6B Directors, Senior Management and Employees—Compensation” for information regarding option-based awards.
Item 7. Major Shareholders and Related Party Transactions
The following table sets forth information relating to the beneficial ownership of our shares as of March 25, 2020,April 1, 2022, by:
• | each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding shares; |
• | each of our current directors; |
• | each of our current executive officers; and |
• | all the foregoing directors and executive officers as a group. |
•each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding shares;
•each of our current directors;
•each of our current executive officers; and
•all the foregoing directors and executive officers as a group.
Beneficial ownership is determined in accordance with SEC rules. The information is not necessarily indicative of beneficial ownership for any other purpose. In general, under these rules a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security. In addition, the rules include common shares issuable pursuant to the exercise of stock options, warrants or other convertible securities that are either immediately exercisable or exercisable on or before May 24, 2020,31, 2022, which is 60 days after March 25, 2020.April 1, 2022. These shares are deemed to be outstanding and beneficially
66
owned by the person holding those options, warrants or other convertible securities for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person, except with respect to the percentage
65
ownership of all directors and executive officers as a group. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
The percentage of common shares beneficially owned is based on 107,351,1452,385,211,502 common shares outstanding as of March 25, 2020. The number and percentage of common shares beneficially owned do not include common shares that may be purchased pursuant to the directed share program.April 1, 2022. The address for each of our directors and executive officers listed below is c/o Sundial Growers Inc., #200,#300, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3.
|
|
|
| Common Shares
| |
Name of beneficial owner | Number
| Percent
|
5% Shareholders(1) |
|
|
ETF Managers Group LLC(2) | 5,394,795 | 5.03% |
|
|
|
Directors and Executive Officers |
|
|
* | * | |
James Keough | * | * |
Andrew Stordeur | * | * |
Ryan Hellard(3) | 1,094,560 | 1.02% |
Charlotte Collett | * | * |
Louise Motala | * | * |
* | * | |
Edward Hellard(4) | 25,213,332 | 23.49% |
Gregory Turnbull(5) | * | * |
* | * | |
Bryan Pinney | — | — |
All current directors and executive officers as a group(6) | 29,913,126 | 27.86% |
Common Shares | ||
Directors and Executive Officers | Number | Percent |
Zachary George | * | * |
James Keough | * | * |
Andrew Stordeur | * | * |
Ryan Hellard | * | * |
Greg Mills | * | * |
Gregory Turnbull | * | * |
Bryan Pinney | * | * |
Lori Ell | * | * |
All current directors and executive officers as a group (eight persons)(1) | * | * |
*Represents beneficial ownership of less than one percent.
(1)Certain of our directors and executive officers are also 5% shareholders, as disclosed in the above table. No 5% shareholder has voting rights different from those of other shareholders.
(2)As reported on Schedule 13G filed by ETF Managers Group LLC on February 27, 2020, ETF Managers Group LLC beneficially owned 5,394,795 shares.
(3)On a fully-diluted basis (as defined below), Mr. Ryan Hellard beneficially holds common shares representing 0.84% of the total voting power of our common shares.
(4)Includes: (i) 800,000 shares purchased from Shelley Unser on October 31, 2017; (ii) 800,000 shares purchased from Shelley Unser on March 31, 2018; (iii) 5,600,000 shares purchased from Stanley Swiatek, in three transactions: 2,400,000 shares on October 31, 2017, 800,000 shares on January 5, 2018 and 2,400,000 shares on March 31, 2018; (iv) 7,149,035 shares issued in 2018 in connection with the Investment and Royalty Agreement; (v) 50,963 shares issued in July 2019 in consideration for advancing the remaining funds available to be advanced under the Investment and Royalty Agreement; and (vi) 3,680,000 shares and 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) issued in connection with the termination of the Investment and Royalty Agreement. See the section entitled “Results of Operations—Liquidity and Capital Resources—Other Significant Transactions—Investment and Royalty Agreement” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. In July 2019, Mr. Hellard transferred all of his Convertible Notes to his spouse and to Mr. Ryan Hellard and, therefore, no longer beneficially owns any Convertible Notes, or shares issuable on conversion of such notes. See the section entitled “Selected Annual Information—Debt—Convertible Notes” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. On a fully-diluted basis (as defined below), Mr. Edward Hellard beneficially holds common shares representing 19.37% of the total voting power of our common shares.
(5)Includes shares held in trust by GMP Securities LP for Mr. Turnbull.
67
(6) Fully-diluted basis for purposes of this table means total number of shares outstanding as of December 31, 2019 as adjusted to include all issued and outstanding common shares and common shares issuable pursuant to outstanding warrants and share based compensation awards.
As of March 25, 2020,April 1, 2022, we had 1,130614 record holders of our common shares, with 1,079544 record holders in Canada, representing 95.49%17.83% of our outstanding common shares, 4164 record holders in the United States, representing 3.63%82.17% of our outstanding common shares and tensix record holders in other foreign jurisdictions, representing 0.88%less than one percent of our outstanding common shares.
In addition to the compensation arrangements discussed under “Executive Compensation”, the following is a description of the material terms of those transactions with related parties to which we are party and which we are required to disclose pursuant to the disclosure rules of the SEC.
Agreements with Directors and Officers
Indemnity Agreements
We have entered into indemnity agreements with each of our directors and officers undertaking to indemnify each of them to the fullest extent permitted by law from and against all liabilities, costs, charges and expenses incurred as a result of actions in the exercise of their duties as a director or officer.
Please see “Item 6B Directors, Senior Management and Employees—Compensation” for information regarding details on employment agreements and agreements with directors.
Registration Rights Agreement
Upon completion of the IPO, we entered into a registration rights agreement, (the “Registration Rights Agreement”), with Edward Hellard, (the “Principal Shareholder”), pursuant to which the Principal ShareholderMr. Hellard was granted certain registration rights. We provided the Principal Shareholder with the right to require the Company to use reasonable commercial efforts to file one or more prospectuses or registration statements with applicable securities regulatory authorities qualifying common shares held by the Principal Shareholder or certain permitted affiliates (a “Demand Distribution”). The Principal Shareholder is entitled to request not more than three Demand Distributions per calendar year, and each Demand Distribution must be comprised of such number of common shares that would reasonably be expected to result in gross proceeds of at least $25 million. The Company may also distribute common shares in connection with a Demand Distribution provided that if the Demand Distribution involves an underwriting and the lead underwriter reasonably determines that the aggregate number of common shares to be included in such Demand Distribution should be limited for certain prescribed reasons, the common shares to be included in the Demand Distribution will be first allocated to the Principal Shareholder and certain permitted affiliates. In addition, the Registration Rights Agreement provides the Principal Shareholder with the right (the “Piggy-Back Registration Right”), to require the Company to include common shares held by the Principal Shareholder and/or certain permitted affiliates in any future offerings undertaken by the Company by way of prospectus or registration statement that it may file with applicable securities regulatory authorities, a (“Piggy-Back Distribution”). The Company is required to use reasonable commercial efforts to cause to be included in the Piggy-Back Distribution all of the common shares that the Principal Shareholder requests to be sold, provided that if the Piggy-Back Distribution involves an underwriting and the lead underwriter reasonably determines that the aggregate number of common shares to be included in such Piggy-Back Distribution should be limited for certain prescribed reasons, the common shares to be included in the Piggy-Back Distribution will be first allocated to the Company.
The registration rights described above expires at such time that the Principal Shareholder holdsterminated when Mr. Hellard’s holdings represented less than 10% of theour outstanding common shares. All expenses in respect of a Demand Distribution and a Piggy-Back Distribution will be borne by the Company, except that any underwriting fee on the sale of any common shares by the Principal Shareholder or certain permitted affiliates will be borne by the Principal Shareholder.
As a result of the transfer undertaking in respect of common shares that was adopted following the completion of our IPO pursuant to a plan of arrangement, the demand and Piggy-Back Registration Rights granted pursuant to the Registration Rights Agreement are limited by the restrictions on transfer imposed by the transfer undertaking, unless a waiver of the transfer undertaking is obtained.
Equity Awards
68
We describe our equity awards under “Item 6B Directors, Senior Management and Employees—Compensation—Long-Term Equity Incentives”.
Interest of Management and Others in Material Transactions
On January 15, 2018, we entered into a credit agreement with 2082033 Alberta Ltd., controlled by our Executive Chairman, and subsequently amended and restated this agreement on August 16, 2018, as the Investment and Royalty Agreement. In the fiscal year
66
ended December 31, 2018, a total of $10.9 million had been invested under the Investment and Royalty Agreement in consideration for the issuance of 7,149,035 of our common shares to our Executive Chairman. In July 2019, we issued an additional 50,963 shares to our Executive Chairman in consideration for advancing the remaining funds available to be advanced under the Investment and Royalty Agreement. In addition, in July 2019, we and our Executive Chairman agreed to terminate the Investment and Royalty Agreement for aggregate consideration of 3,680,000 common shares, 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) and a cash payment of $9.5 million. Upon completion of our IPO, the purchase was completed resulting in a loss on a financial obligation of $59.6 million based on our IPO price of US$13.00 per share. The cash payment of $9.5 million was made on September 19, 2019. See the section titled “Other Significant Transactions – Investment and Royalty Agreement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
Additionally, in the fiscal year ended December 31, 2018, we entered into an agreement with 2119694 Alberta Inc., a company controlled by Stanley Swiatek, who resigned as director in connection with the execution of the agreement, to repurchase a total of 9,815,701 common shares, at a weighted average price of $1.69 per common share, for total consideration of $16.5 million, $6.9 million of which was paid by granting an unsecured, subordinated promissory note accruing interest at a rate of 1% per month until repayment. As at March 31, 2019, $14,000 in interest had been accrued on the promissory note, and a balance, including accrued interest, of $6.9 million remained outstanding. The full balance outstanding was repaid in June 2019. See the section titled “Debt—Promissory Note” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations attached to this Annual Report as Exhibit 15.1.
We had entered into a professional services agreement, dated May 8, 2017, with AppColony Inc., a company controlled by our former Executive Chairman and in which our Chief Marketing and ProductStrategy Officer iswas a shareholder, for marketing, brand research, development and promotional services. The agreement provided for an initial term of two years, with specific services to be performed and amounts to be charged in respect of such services to be agreed between the parties from time to time pursuant to one or more statements of work. The initial term of this agreement had expired and on July 8, 2019, we have entered into a new professional services agreement with AppColony Inc. for certain information technology project and development services to be agreed between the parties from time to time pursuant to one or more statements of work, for a total monthly retainer of $0.3 million. The term of this agreement is two years. We paid AppColony $1.1 million during the year ended December 31, 2020 and had no amounts owing at December 31, 2020. We paid AppColony Inc. $3.1 million during the year ended December 31, 2019 and owed a balance of $0.3 million at December 31, 2019 for services related to this agreement. InAppColony Inc. ceased to be a related party with the fiscal year ended December 31, 2018, we also paid $2.3 million to AppColony Inc., and owed a balanceresignation of $0.3 million relating to services under this agreement asour former Executive Chairman from our board of December 31, 2018.directors in April 2020.
In the fiscal year ended December 31, 2018,2019, we paid $0.2$0.3 million for research and development services and for access and licenselicence of certain strains of cannabis for research purposes, with a balance of $19,031 owing as at December 31, 2018,2019, to PlantBiosis Ltd. and Inplanta Biotechnology Inc., in both of which one of our former non-executive employees, Dr. Igor Kovalchuk, maintainsmaintained influence. During the year ended December 31, 2019,2020, we paid these companies $334,476$30,000 and owed $19,031 balancenothing for their services.
InOne of our directors, Gregory Turnbull, is a former partner at McCarthy Tétrault LLP, a law firm that provides legal services to the fiscalCompany. We paid McCarthy Tétrault LLP $2.5 million during the year ended December 31, 2018, two2020 and owed a balance of our directors, Lee Tamkee$0.5 million at December 31, 2020, which was fully paid during 2021. We paid $3.9 million during the year ended December 31, 2019 and owed a balance of $0.4 million at December 31, 2019. McCarthy Tétrault LLP ceased to be a related party with the retirement of Gregory Turnbull (through G.B.T. Holdings Ltd.), three of our executive officers, Edward Hellard, Geoff Thompson (through Boardwalk Management Consulting Ltd.) and Andrew Stordeur, as well as one of our non-executive employees, Kristine Dow, subscribed to our offering of Convertible Notes,from McCarthy Tétrault in the aggregate amount of $7.0 million, representing approximately 24% of the proceeds of the offering, and received $137,870 in interest thereon, as well as commissions totaling $318,440, during the same period. See the section titled “Debt—Convertible Notes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. All of the foregoing individuals or entities (or their transferees) participated in lockup agreements and, as a result, received additional fractional warrants.December 2020.
On April 1, 2019, we entered into an employment agreement with our former Vice President, Processing, in connection with which we have also agreed to purchase certain equipment for THC and CBD extraction from the employee in consideration for $900,000 payable, at the employee’s option, in monthly installments of $100,000 beginning with July 2019, or in our shares, at a price per share equivalent to 90% of the fair market value of one share following the closing of the IPO.
69
In May 2019, one of our directors, Greg Mills, subscribed to our offering of Senior Convertible Notes,senior convertible notes, in the aggregate amount of $100,000 of the total $92.3 million raised in the offering. See the section titled “Debt—Senior Convertible Notes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations attached to this Annual Report as Exhibit 15.1.
We lease the land on which Bridge Farm’s Homestead Facility and Horseshoe Facility are located from an entity owned by family members of our former Chief Operating Officer—Europe, at an annual rent of £132,000 and £468,000, respectively. See “Item 4D Property, plant and equipment—Bridge Farm Facilities”.
Except as set out above or described elsewhere in this Annual Report, there are no material interests, direct or indirect, of any of our directors or executive officers, any shareholder that beneficially owns, or controls or directs (directly or indirectly), more than 10% of any class or series of our outstanding voting securities, or any associate or affiliate of any of the foregoing persons, in any transaction within the preceding three fiscal years that has materially affected or is reasonably expected to materially affect us or any of our subsidiaries.
Indebtedness of Directors, Executive Officers and Employees
Except as set out below or described elsewhere in this Annual Report, as of the date of this Annual Report, none of our directors, executive officers, employees, former directors, former executive officers or former employees or any of our subsidiaries, and none of their respective associates, is indebted to us or any of our subsidiaries or another entity whose indebtedness is the subject of a guarantee, support agreement, letter of credit or other similar agreement or understanding provided by us or any of our subsidiaries, except, as the case may be, for routine indebtedness as defined under applicable securities legislation.
Aggregate Indebtedness
67
(in thousands) |
|
|
Purpose
| To us or our
| To Another Entity
|
Share purchases | — | — |
Other |
| — |
We havehad entered into separate shareholder loan agreements to advance funds to our non-executive employees, Frank Luke Fallwell and Gregg Wigeland. These loans bear interest ranging from 0.0% to 1.5% per annum and are secured by the employees’ holdings of shares or warrants, as applicable, in the Company. They are repayable in full upon the employees’ departure, a change of control of the Company, sale of the Company or conclusion of the applicable term of the loan (which ranges from on demand to three years). As at December 31, 2019, $200,000 had been advanced under these loan agreements. During the year ended December 31, 2020, $61,250 was repaid and the balance outstanding at December 31, 2020 was $138,750. During the year ended December 31, 2021, the balance of $138,750 was settled and at December 31, 2021 there was no balance outstanding.
We have also entered into a loan agreement to advance funds to a non-executive employee, Jamie Cox. The loan of $90,000 to Jamie Cox had been repaid in the first quarter of 2019.
Overall, as at December 31, 2019,2021, we were owed $0.2 million from related parties and owed $1.0 milliondid not owe anything to related parties, including employees, directors and corporations related to these individuals.individuals, and such parties owed nothing to us.
Indebtedness of Directors and Executive Officers under Securities Purchase and Other Programs
We had entered into shareholder loan agreements with our Former Chief Executive Officer, Torsten Kuenzlen, on February 15, 2018 and with our President and Chief Operating Officer, Andrew Stordeur, on April 6, 2018. Mr. Stordeur was entitled to a loan facility of up to $510,000 and Mr. Kuenzlen was entitled to a loan facility of up to $200,000 per year. Each of the loans bore interest at a rate of 2.5% per annum and was secured against the borrowers’ shareholdings in the Company. The loans were repayable in full upon the officers’ departure, a change of control of the Company or sale of the Company. $245,000 had been advanced to Mr. Stordeur, and $400,000 has been advanced to Mr. Kuenzlen. Prior to June 30, 2019, these loans were settled in full and were no longer outstanding.
For a description of certain other related party transactions, see note 2030 to our audited consolidated financial statements for the fiscal periods ended December 31, 20192021 and 2018.2020.
Directed Share Program
As part of our IPO completed in August 2019, the underwriters had reserved for sale, at the public offering price, up to 5% of our common shares being offered in the offering to certain individuals, including certain of our officers, directors and employees, as part of a directed share program. Certain of our officers, directors and employees participated in this program and acquired shares thereunder.
70
Not applicable.
The Company’s Annual Financial Statements are included beginning on page F-1 of this Annual Report.
Legal Proceedings
Securities Class Actions
The CompanyIn connection with our IPO, we and certain of our current and former officers and directors, as well as the underwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and November 1, 2019. The cases have beenwere consolidated in two separate actions depending on the court in which they were first filed, one in the Supreme Court of New York, New York County, captioned In re Sundial Growers Inc. Securities Litigation, Index No. 655178/2019 (the “New York IPO Action”), and the other in the United States District Court for the Southern District of New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC.
19-cv-08913-ALC (the “Federal IPO Action”). The complaints in each of the two consolidated actions assertsassert claims under Sections 11, 12(a)(2), and 15 of the U.S. Securities Act of 1933.1933, as amended (the “Securities Act”). They generally allege that the Companywe made material misstatements and omissions in the prospectus and registration statement in connection with the Company’s IPO. In this regard,IPO with respect to, among other things, the complaints allege that the offering documents did notfailure to disclose systemic quality control issues atas well
68
as the Company and the return or rejection of cannabis and termination of the supply agreement by one of the Company’s customers. The complaint in the Federal IPO Action also includes allegations that we made misstatements as to revenue. The New York IPO Action was dismissed on May 15, 2020 and the dismissal was affirmed on February 16, 2021, by the Appellate Division, First Judicial Department, of the Supreme Court of New York.
In the Federal IPO Action, the court denied defendants’ motion to dismiss on March 30, 2021. On August 27, 2021, following a mediation, the parties notified the court that they had reached an agreement in principle to settle the Federal IPO Action. On December 2, 2021, the parties executed a settlement agreement, which was submitted to the court for approval on December 3, 2021 and remains subject to such court approval. As of December 31, 2021, we have recorded a reserve in the amount of $8.9 million in respect of this matter.
In addition, on May 7, 2020, the Company and certain of its current and former directors and officers were named as defendants in a lawsuit, captioned SUN, a Series of E Squared Investment Fund, LLC et al. v. Sundial Growers Inc. et al., Case No. 1:20-cv-03579-ALC, in the United States District Court for the Southern District of New York. The complaint asserts claims for alleged violations of U.S. federal securities laws, including Sections 12(a)(2) and 15 of the Securities Act and Section 10(b) the Exchange Act, as well as claims for breach of contract, fraud in the inducement and negligent misrepresentation. Among other things, the complaint alleges that the company made misrepresentations regarding the licensing and ability of Bridge Farm to export hemp and CBD to Europe, as well as regarding the quality of the Company’s cannabis. On September 30, 2021, the court granted defendants’ motion to dismiss and dismissed the case, dismissing the claims under the U.S. federal securities laws with prejudice and the remaining claims without prejudice.
We can provide no assurance as to the outcome of thesesuch proceedings or any other litigation matter in which we are a party. In particular, securities class action lawsuits are typically costly to defend, and divert the attention of management and other resources from operations and, accordingly, even if resolved in our favor, could have a material adverse effect on our business, financial condition, results of operations and liquidity and may force us to reduce or cease operations or seek relief under the applicable bankruptcy or insolvency laws.
LP Supply Agreements
We have several supply agreements or arrangements with other licensed cannabis producers (“LP Supply Agreements”), a certain number of which provide obligations for us to deliver bulk cannabis for resale by such other producer under its own brand.
We have entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under an LP Supply Agreement. Under this settlement agreement, we have agreed to pay penalties in the amount of $1.7 million on or prior to December 31, 2019, for which we have recorded a reserve, and, upon the payment of such penalties, our obligations under such LP Supply Agreement will be terminated.
Although we do not have a supply agreement with the province of Quebec, we do have a licence to sell cannabis to licensed producers, including those based in Quebec. We have received notice of a legal proceeding commenced against us in the province of Quebec by another licensed cannabis producer, which is based in Quebec, alleging breach of an LP Supply Agreement and have filed a statement of defence. WeAs of December 31, 2021, we have recorded a reserve in the amount of $1.5$2.6 million in respect of this matter. All litigation steps have been completed, including discoveries and our filing of a defence, and the parties are awaiting to be called by the court to schedule the trial.
Other Proceedings
Our former Vice President, Processing, has sued us for $630,000 in respect of unpaid consideration for certain equipment we have purchased from him, unpaid wages and wrongful termination. We believe we have meritorious defenses to this claim and intend to vigorously defend it, but we can provide no assurance as to the outcome of this proceeding. We have recorded a reserve in the amount of $300,000$150,000 in respect of this matter.
Zenabis filed a petition with the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the Royalty. Zenabis sought the court’s determination of the correct calculation of the amount required to exercise an option to buy out the amended Royalty, which Zenabis contended was nil and Sundial asserted was $13.7 million. The court subsequently dismissed the petition and did not decide the merits of the case. Zenabis had 30 days from December 17, 2021 to file a notice of appeal in respect of the court’s findings, but they did not do so.
We have been named as a defendant in a claim commenced in the Court of Queen’s Bench of Alberta by statement of claim filed on June 17, 2021 whereby the plaintiff alleges that he was entitled to 25% ownership of Sundial and was not paid for his interest prior to our IPO. We dispute any liability to the plaintiff. We do not plan to file a statement of defence unless requested to do so.
One of our former employees commenced a claim against us for $ 425,000, plus costs and interest, in respect of wrongful termination and severance pay. We have filed a statement of defence as of November 8, 2021. The proceeding’s next stage involves the exchange of Affidavits of Records.
Sun 8 Holdings Inc. (“Sun 8”) commenced a claim against us in the Court of Queen’s Bench of Alberta by statement of claim filed on November 30, 2021 whereby Sun 8 sought judgement in the amount of $930,070.49 plus interest and costs, specific performance of certain contractual obligations it was asserted we owe Sun 8, and $100,000 for alleged breach of a duty of good faith and honest performance and corollary relief. The basis of the claim was an allegation that we failed to pay Sun 8 royalty amounts due to Sun 8,
69
and that we had not provided information required by contract. The claim has been settled in full, and the settlement is complete subject to two post-closing items that remain outstanding.
Potential Litigation Proceedings
From time to time, in addition to the litigation proceedings described above, we may become involved in legal proceedings arising in the ordinary course of our business. Such proceedings, certain of which have been threatened against us, could include, among other matters, commercial litigation related to breach of contract claims brought by our customers, suppliers and contractors, as well as litigation related to our securities and litigation related to termination of certain of our employees. Furthermore, in addition to the securities class actions described above, we have also received threats of litigation from certain holders of our Senior Convertible Notes. The outcome of any litigation is inherently uncertain.
71
Although we believe we have meritorious defenses against all currently threatened proceedings and intend to vigorously defend all claims if they are brought, unfavorable rulings, judgmentsjudgements or settlement terms could have a material adverse impact on our business and results of operations.
Dividend Policy
We have never paid dividends on our common shares. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. As such, we do not intend to declare or pay cash dividends on our common shares in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our earnings, operating results, financial condition and current and anticipated cash needs. Our future ability to pay cash dividends on our common shares may be limited by the terms of any then-outstanding debt or preferred securities.
Changes to executive team and board of directorsNot applicable.
In January, 2020, Sundial announced the following changes to its executive team and board of directors;
Zach George, a recently appointed member of Sundial’s board of directors, was appointed as Chief Executive Officer;
Andrew Stordeur, formerly President of Sundial's Canadian operations was appointed as President and Chief Operating Officer;
Edward Hellard stepped down as Executive Chairman, but remains on the board of directors, and as chair of the Mergers and Acquisitions Committee;
Torsten Kuenzlen, Sundial’s former Chief Executive Officer, resigned and stepped down from the board of directors; and
Brian Harriman, Sundial's former Chief Operating Officer, left the Company.
Operational updates
In February 2020, Health Canada issued the Company a licence to sell dried and fresh cannabis from its Olds facility. This licence enables the Company to increase production capacity for sales of branded products to provincial boards by leveraging the processing capabilities of both its Olds and Rocky View facilities. The Company also commenced oil extraction operations at its Olds facility in the first quarter of 2020.
Sales and marketing updates
In the first quarter of 2020, the Company began making sales of cannabis through its medical platform to a limited customer base.
Item 9. The Offer and Listing.
Not applicable.
Not applicable.
The Company’s common shares were listed on the Nasdaq in the United States for trading in U.S. dollars since August 1, 2019 under the symbol “SNDL”.
72
Not applicable.
Not applicable.
Item 10. Additional Information.
Not applicable.
F. | Expenses of the issue. |
Not applicable.
Item 10. Additional Information.
A. | Share capital. |
Not applicable.
B. | Memorandum and articles of association. |
Reference is made to the section entitled “Description of Share Capital—Other Important Provisions of our Amended Articles of Incorporation, By-Laws and the ABCA” and “Description of Share Capital—Comparison of Alberta Corporate Law and Our Articles of Incorporation and Delaware Corporate Law” in the Company’s prospectus, filed with the SEC on July 31, 2019.
70
We have not entered into any material contracts outside the ordinary course of business other than as described elsewhere in this Annual Report or exhibits hereto.
There is no limitation imposed by Canadian law or by our amended articles of incorporation on the right of a non-resident to hold or vote our common shares, other than discussed below.
Competition Act
Limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition (the “Commissioner”), to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. This legislation grants the Commissioner jurisdiction, for up to one year after the acquisition has been substantially completed, to challenge this type of acquisition by seeking a remedial order, including an order to prohibit the acquisition or require divestitures, from the Canadian Competition Tribunal, which may be granted where the Competition Tribunal finds that the acquisition substantially prevents or lessens, or is likely to substantially prevent or lessen, competition.
This legislation would also require any person or persons who intend to acquire more than 20% of our voting shares or, if such person or persons already own more than 20% of our voting shares prior to the acquisition, more than 50% of our voting shares, to file a notification with the Canadian Competition Bureau if certain financial thresholds are exceeded. These financial thresholds would be exceeded if: (i) we have assets in Canada or revenues in or from Canada generated from those assets of $96 million or more (this threshold is adjusted annually); and (ii) we and the potential acquirer together have assets in Canada or revenues from sales in, from or into Canada of $400 million or more. Where a notification is required, unless an exemption is available, the legislation prohibits completion of the acquisition until the expiration of the applicable statutory waiting period, unless the Commissioner either waives or terminates such waiting period or issues an advance ruling certificate. The Commissioner’s review of a notifiable transaction for substantive competition law considerations may take longer than the statutory waiting period.
Investment Canada Act
The Investment Canada Act requires each “non-Canadian” (as defined in the Investment Canada Act) who acquires “control” of an existing “Canadian business”, to file a notification in prescribed form with the responsible federal government department or departments not later than 30 days after closing, provided the acquisition of control is not a reviewable transaction under the Investment Canada Act. Subject to certain exemptions, a transaction that is reviewable under the Investment Canada Act may not be implemented until an application for review has been filed and the responsible minister of the federal cabinet has determined that the investment is likely to be of “net benefit to Canada” taking into account certain factors set out in the Investment Canada Act. Under the Investment Canada Act, an investment in our common shares by a non-Canadian would be reviewable only if it were an investment to acquire control of us
73
pursuant to the Investment Canada Act and our enterprise value was equal to or greater than $1.568 billion for “trade agreement investors” (which include United States or EU investors, among certain others) and $1.045 billion for other investors from World Trade Organization (“WTO”), member countries. Lower financial thresholds apply to state-owned or influenced enterprises and non-WTO investors. These thresholds are adjusted annually.
Under the national security review regime in the Investment Canada Act, review on a discretionary basis may also be undertaken by the federal government in respect to a much broader range of investments by a non-Canadian to “acquire, in whole or part, or to establish an entity carrying on all or any part of its operations in Canada.” No financial threshold applies to a national security review. The relevant test is whether such investment by a non-Canadian could be “injurious to national security.” The responsible ministers have broad discretion to determine whether an investor is a non-Canadian and therefore subject to national security review. Review on national security grounds is at the discretion of the responsible ministers and may occur on a pre- or post-closing basis.
Other
There is no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect the remittance of dividends or other payments by us to non-resident holders of our common shares, other than withholding tax requirements.
Certain U.S. Federal Income Tax Considerations for U.S. Persons
The following is a general discussion of the principal U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares that are generally applicable to a U.S. Holder, as defined below. This summary assumes that the common shares are held as capital assets (generally, property held for investment), within the meaning of the U.S. Internal Revenue
71
Code of 1986, as amended (the “Code”), in the hands of a U.S. Holder at all relevant times. This discussion is based on the Code, final, temporary and proposed Treasury regulations thereunder (the “Treasury Regulations”) pertinent judicial decisions, interpretive rulings of the U.S. Internal Revenue Service (the “IRS”), and such other authorities as we have considered relevant. Future legislative, judicial, or administrative modifications, revocations, or interpretations, which may or may not be retroactive, may result in U.S. federal income tax consequences significantly different from those discussed herein. This discussion is not binding on the IRS. No ruling has been or will be sought or obtained from the IRS with respect to any of the U.S. federal tax consequences discussed herein. There can be no assurance that the IRS will not challenge any of the conclusions described herein or that a U.S. court will not sustain such a challenge.
This discussion does not address the U.S. federal income tax consequences to U.S. Holders subject to special rules, including U.S. Holders that (i) are banks, financial institutions, or insurance companies, (ii) are regulated investment companies or real estate investment trusts, (iii) are brokers, dealers, or traders in securities or currencies, (iv) are tax-exempt organizations, (v) are governments or agencies or instrumentalities thereof, (vi) elect to mark their securities to market, (vii) hold the common shares as part of hedges, straddles, constructive sales, conversion transactions, or other integrated investments, (ix) acquire the common shares as compensation for services or through the exercise or cancellation of employee stock options or warrants, (x) have a functional currency other than the U.S. dollar, (xi) own or have owned directly, indirectly, or constructively, shares of the Company representing 10% or more of the voting power or value of the Company, or (xii) are subject to the alternative minimum tax.
In addition, this discussion does not address tax considerations relevant to U.S. Holders under any non-U.S., state or local tax laws, the Medicare tax on net investment income, U.S. federal estate, gift tax, or other non-income tax, or the alternative minimum tax. Each U.S. Holder is urged to consult its tax advisors regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of an investment in the common shares.
As used herein, “U.S. Holder” means a beneficial owner of common shares that is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes, (ii) a corporation (or other entity taxable as a corporation for U.S. federal tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source, or (iv) a trust that (a) is subject to the primary supervision of a court within the United States and for which one or more U.S. persons have authority to control all substantial decisions or (b) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
If a pass-through entity, including a partnership or other entity taxable as a partnership for U.S. federal income tax purposes, holds common shares, the U.S. federal income tax treatment of an owner or partner generally will depend on the status of such owner or partner and on the activities of the pass-through entity. A U.S. person that is an owner or partner of a pass-through entity holding the common shares is urged to consult its own tax advisor.
PFIC Rules
A non-U.S. corporation, such as the Company, will be classified as a PFIC for U.S. federal income tax purposes for a taxable year, if either (a) 75% or more of the gross income of the Company consists of certain types of passive income (which we refer to as the “income test”) or (b) 50% or more of the value of the Company’s assets either produce passive income or are held for the production of passive income. The value of the Company’s assets for this purpose is expected to be based, in part, on the quarterly average of the fair market value of such assets (which we refer to as the “asset test”). “Gross income” generally includes all sales revenues less the cost of goods sold. “Passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions, but does not include active business gains arising from the sale of certain commodities.
For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, and assuming certain other requirements are met, “passive income” does not include certain interest, dividends, rents, or royalties that are received or accrued by the Company from certain “related persons” (as defined in the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.
There is a significant risk that the Company may be classified as a PFIC for the tax year ending December 31, 2021. No opinion of legal counsel or ruling from the IRS concerning the status of the Company as a PFIC has been obtained or is currently planned to be requested. The determination of whether any corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each such tax year and, as a result, the Company’s PFIC status for the current year and future years cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any PFIC determination made by the Company. Each U.S. Holder should consult its own tax advisor regarding the Company’s status as a PFIC and the PFIC status of each non-U.S. subsidiary of the Company.
72
In any year in which the Company is classified as a PFIC, a U.S. Holder will be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. In addition to penalties, a failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621 annually.
If the Company is a PFIC in 2021 or any other year in which a U.S. Holder owns common shares, the U.S. federal income tax consequences to a U.S. Holder of the purchase of common shares and the acquisition, ownership, and disposition of common shares will depend on whether such U.S. Holder makes a “qualified electing fund” or “QEF” election under Section 1295 of the Code (a “QEF Election”) or makes a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”) with respect to common shares. A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election (a “Non-Electing U.S. Holder”) will be subject to certain adverse tax treatment described below.
A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with respect to (a) any gain recognized on the sale or other taxable disposition of common shares and (b) any excess distribution received on the common shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for the common shares, if shorter).
Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of common shares of a PFIC, and any excess distribution received on such common shares (or a distribution by a subsidiary PFIC to its shareholder that is deemed to be received by a U.S. Holder) must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the common shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income (and not eligible for certain preferential tax rates, as discussed below). The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible.
If the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder holds common shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. If the Company ceases to be a PFIC, a Non-Electing U.S. Holder may terminate this deemed PFIC status with respect to common shares by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code as discussed above) as if such common shares were sold on the last day of the last tax year for which the Company was a PFIC.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market Election with respect to common shares only if the common shares are marketable stock. The common shares generally will be “marketable stock” if the common shares are regularly traded on a national securities exchange that is registered with the SEC (including the Nasdaq). If such stock is traded on such a qualified exchange or other market, such stock generally will be considered “regularly traded” for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Provided that the common shares are “regularly traded” as described in the preceding sentence, the common shares are expected to be marketable stock. We believe that the Company’s common shares were “regularly traded” in each quarter of 2021 and expect that the common shares should continue to be “regularly traded” in 2022. However, there can be no assurance that the common shares will be “regularly traded” in the current or any subsequent calendar quarters. U.S. Holders should consult their own tax advisors regarding the marketable stock rules.
A U.S. Holder that makes a Mark-to-Market Election with respect to its common shares generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such common shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder’s holding period for the common shares and such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the common shares.
A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares, as of the close of such tax year over (b) such U.S. Holder’s tax basis in the common shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (i) such U.S. Holder’s adjusted tax basis in the common shares, over (ii) the fair market value of such common shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax years).
A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of common shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary
73
income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years).
A U.S. Holder makes a Mark-to-Market Election by attaching a completed IRS Form 8621 to a timely filed U.S. federal income tax return (taking into account any extensions to file such U.S. federal income tax return). A timely Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the common shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.
Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to the common shares, no such election may be made with respect to the stock of any subsidiary PFIC that a U.S. Holder is treated as owning because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to eliminate the interest charge and other income inclusion rules described above with respect to deemed dispositions of subsidiary PFIC stock or distributions from a subsidiary PFIC to its shareholder.
QEF Election
A U.S. Holder that makes a QEF Election for the first tax year in which the Company is treated as a PFIC generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to its common shares. However, a U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the Company’s net capital gain, which will be taxed as long-term capital gain to such U.S. Holder, and (b) the Company’s ordinary earnings, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of (a) net long-term capital gain over (b) net short-term capital loss, and “ordinary earnings” are the excess of (a) “earnings and profits” over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a timely QEF Election generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of common shares.
The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” for purposes of avoiding the default PFIC rules discussed above if such QEF Election is made for the first year in the U.S. Holder’s holding period for the common shares in which the Company is a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year (taking into account any extensions to file such U.S. federal income tax return). If a U.S. Holder owns PFIC stock indirectly through another PFIC, separate QEF Elections must be made for the PFIC in which the U.S. Holder is a direct shareholder and the subsidiary PFIC for the QEF rules to apply to both PFICs.
A QEF Election will apply to the tax year for which such QEF Election is made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years in which we were not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which the Company qualifies as a PFIC.
U.S. Holders should be aware that there can be no assurances that the Company will satisfy the record keeping requirements that apply to a QEF, or that the Company will supply U.S. Holders with a PFIC Annual Information Statement or other information that such U.S. Holders are required to report under the QEF rules, in the event that we are a PFIC. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a QEF Election.
A U.S. Holder makes a QEF Election by attaching a completed IRS Form 8621, including a PFIC Annual Information Statement, to a timely filed U.S. federal income tax return. However, if the Company does not provide the required information, U.S. Holders will not be able to make a QEF Election for such entity and will continue to be subject to the rules of Section 1291 of the Code discussed above that apply to Non-Electing U.S. Holders with respect to the taxation of gains and excess distributions.
74
Distributions on the Common Shares
74
Subject to the PFIC rules discussed below,above, the gross amount of any distribution paid by the Company will generally be subject to U.S. federal income tax as foreign source dividend income to the extent paid out of the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such amount will be includable in gross income by a U.S. Holder as ordinary income on the date that such U.S. Holder actually or constructively receives the distribution in accordance with such holder’s regular method of accounting for U.S. federal income tax purposes. The amount of any distribution made by the Company in property other than cash will be the fair market value (determined in U.S. dollars) of such property on the date of the distribution. Because the Company does not intend to calculate its earnings and profits on the basis of U.S. federal income tax principles, any distribution paid will generally be treated as a dividend for U.S. federal income tax purposes. Dividends paid by the Company will not be eligible for the dividends received deduction allowed to corporations.
To the extent that a distribution exceeds the amount of the Company’s current and accumulated earnings and profits, as determined under U.S. federal income tax principles, such distribution will be treated first as a tax-free return of capital, causing a reduction in a U.S. Holder’s adjusted basis in the common shares held by such U.S. Holder (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by such U.S. Holder upon a subsequent disposition of the common shares), with any amount that exceeds such U.S. Holder’s adjusted basis being taxed as a capital gain recognized on a sale or exchange (as discussed below).
So long as the common shares are listed on the Nasdaq or the Company is eligible for benefits under the Income Tax Convention between the U.S. and Canada, dividends that a U.S. Holder receives from the Company will be “qualified dividend income” if certain holding period and other requirements (including a requirement that the Company is not a PFIC in the year of the dividend or the immediately preceding year) are met. Qualified dividend income of an individual or other non-corporate U.S. Holder is subject to a reduced maximum U.S. federal income tax rate. However, if the Company is a PFIC in the year of the dividend or was a PFIC in the immediately preceding year, distributions on the common shares will not constitute “qualified dividend income” eligible for the preferential tax rates described above.
Subject to certain limitations, Canadian tax withheld with respect to distributions made on the common shares may be treated as foreign taxes eligible for credit against a U.S. Holder’s U.S. federal income tax liability. Alternatively, a U.S. Holder may, subject to applicable limitations, elect to deduct the otherwise creditable Canadian withholding taxes for U.S. federal income tax purposes. The rules governing the foreign tax credit are complex and involve the application of rules that depend upon a U.S. Holder’s particular circumstances. Accordingly, a U.S. Holder is urged to consult its tax advisor regarding the availability of the foreign tax credit under its particular circumstances.
Sale, Exchange or Other Taxable Disposition of the Common Shares
Subject to the PFIC rules discussed below,above, a U.S. Holder generally will recognize gain or loss upon the taxable sale, exchange or other disposition of the common shares in an amount equal to the difference between (i) the U.S. dollar value of the amount realized upon the sale, exchange or other taxable disposition and (ii) such U.S. Holder’s adjusted tax basis in the common shares. A U.S. Holder’s adjusted tax basis in such common shares will generally be its U.S. dollar cost. Generally, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if, on the date of the sale, exchange or other taxable disposition, such U.S. Holder has held the common shares for more than one year. If such U.S. Holder is an individual or other non-corporate U.S. Holder, long-term capital gains will be subject to a reduced maximum U.S. federal income tax rate. The deductibility of capital losses is subject to limitations under the Code. Gain or loss, if any, that a U.S. Holder realizes upon a sale, exchange or other taxable disposition of the common shares generally will be treated as having a U.S. source for U.S. foreign tax credit limitation purposes.
PFIC Rules
A non-U.S. corporation, such as the Company, will be classified as a PFIC for U.S. federal income tax purposes for a taxable year, if either (a) 75% or more of the gross income of the Company consists of certain types of passive income (which we refer to as the “income test”) or (b) 50% or more of the value of the Company’s assets either produce passive income or are held for the production of passive income. The value of the Company’s assets for this purpose is expected to be based, in part, on the quarterly average of the fair market value of such assets (which we refer to as the “asset test”). “Gross income” generally includes all sales revenues less the cost of goods sold. “Passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions, but does not include active business gains arising from the sale of certain commodities.
For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, and assuming certain other requirements are met, “passive income” does not include certain interest, dividends, rents, or royalties that
75
are received or accrued by the Company from certain “related persons” (as defined in the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.
Based on the projected composition of the Company’s assets and income, the Company does not believe that it was a PFIC for the taxable year ending December 31, 2019, and the Company does not anticipate becoming a PFIC for the current taxable year. Although the Company does not anticipate becoming a PFIC, because the value of the Company’s assets for purposes of the PFIC asset test generally should be determined by reference to the market price of the shares, it is possible that fluctuations in the market price of the shares may cause the Company to become a PFIC for the current or any subsequent taxable year. The determination of whether the Company will become a PFIC will also depend, in part, on the composition of its income and assets, which will be affected by how, and how quickly, the Company uses its liquid assets and cash raised in any offerings. Whether the Company is a PFIC is a factual determination and the Company must make a separate determination each taxable year as to whether it is a PFIC (after the close of each taxable year). Accordingly, the Company cannot assure holders that it will not be a PFIC during the current or any future taxable year. If the Company is classified as a PFIC for any taxable year during which a U.S. Holder holds shares, the Company will continue to be treated as a PFIC, unless the U.S. Holder makes certain elections, for all succeeding years, even if the Company ceases to qualify as a PFIC under the rules set forth above.
If the Company is considered a PFIC at any time that a U.S. Holder holds common shares, any gain recognized by the U.S. Holder on a sale or other disposition of the common shares, as well as the amount of any “excess distribution” (defined below) received by the U.S. Holder, would be allocated ratably over the U.S. Holder’s holding period for the common shares. The amounts allocated to the taxable year of the sale or other disposition (or the taxable year of receipt, in the case of an excess distribution) and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed. For the purposes of these rules, an excess distribution is the amount by which any distribution received by a U.S. Holder on common shares exceeds 125% of the average of the annual distributions on the common shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment or a “qualified electing fund” election) of the common shares if the Company is considered a PFIC. However, the Company does not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different from the general tax treatment for PFICs described above.
If a U.S. Holder holds common shares during any taxable year that the Company is a PFIC, such holder must file an annual report with the IRS, subject to certain exceptions based on the value of the common shares held.
Holders are urged to consult their tax advisor concerning the U.S. federal income tax consequences of purchasing, holding, and disposing common shares if the Company is or becomes a PFIC, including the possibility of making any election that may be available under the PFIC rules (including a mark-to-market election), which may mitigate the adverse U.S. federal income tax consequences of holding common shares of a PFIC.
Receipt of Foreign Currency
The U.S. dollar value of any cash distribution made in Canadian dollars to a U.S. Holder will be calculated by reference to the exchange rate prevailing on the date of actual or constructive receipt of the distribution, regardless of whether the Canadian dollars are converted into U.S. dollars at that time. For U.S. Holders following the accrual method of accounting, the amount realized on a disposition of the common shares for an amount in Canadian dollars will be the U.S. dollar value of this amount on the date of disposition. On the settlement date, such U.S. Holder will recognize U.S. source foreign currency gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the U.S. dollar value of the amount received based on the exchange rates in effect on the date of sale or other disposition and the settlement date. However, in the case of shares traded on an established securities market that are sold by a cash method U.S. Holder (or an accrual method U.S. Holder that so elects), the amount realized will be based on the spot rate in effect on the settlement date for the disposition, and no exchange gain or loss will be recognized at that time. A U.S. Holder will generally have a basis in Canadian dollars equal to their U.S. dollar value on the date of receipt of such distribution, on the date of disposition, or, in the case of cash method U.S. Holders (and accrual method U.S. Holders that so elects), on the date of settlement. Any U.S. Holder that receives payment in Canadian dollars and converts or disposes of the Canadian dollars after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss and that generally will be U.S. source income or loss for foreign tax credit purposes. U.S. Holders are urged to consult their own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of Canadian dollars.
75
Information with Respect to Foreign Financial Assets
Individuals and certain entities that own “specified foreign financial assets,” generally with an aggregate value in excess of $50,000 are generally required to file an information report on IRS Form 8938, Statement of Specified Foreign
76
Financial Assets, with respect to such assets with their tax returns for each year in which they hold shares. “Specified foreign financial assets” include any financial accounts maintained by certain foreign financial institutions, as well as securities issued by non-U.S. persons if they are not held in accounts maintained by financial institutions. U.S. Holders are urged to consult their tax advisors regarding the application of this reporting requirement to their ownership of the common shares.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends paid to a U.S. Holder in respect of the common shares and the proceeds received by such U.S. Holder from the sale, exchange or other disposition of the common shares within the United States unless such U.S. Holder is a corporation or other exempt recipient. Backup withholding may apply to such payments if a U.S. Holder fails to provide a taxpayer identification number or certification of exempt status or fails to report dividend and interest income in full. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against a U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.
Disclosure Requirements for Certain U.S. Holders Recognizing Significant Losses
A U.S. Holder that claims significant losses in respect of common shares for U.S. federal income tax purposes (generally (i) $10 million or more in a taxable year or $20 million or more in any combination of taxable years for corporations or partnerships all of whose partners are corporations, (ii) $2 million or more in a taxable year or $4 million or more in any combination of taxable years for all other taxpayers, or (iii) $50,000 or more in a taxable year for individuals or trusts) with respect to a foreign currency transaction, may be required to file Form 8886 for “reportable transactions.” U.S. Holders should consult their own tax advisors concerning any possible disclosure obligation with respect to the common shares.
Certain Canadian Tax Implications for Non-Canadian Holders
The following summary describes, as of the date hereof, the principal Canadian federal income tax considerations generally applicable to a purchaser who acquires, as a beneficial owner, common shares pursuant to this offering and who, at all relevant times, for the purposes of the application of theFederal Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “Canadian Tax Act”), (1) is not, and is not deemed to be, resident in Canada for purposes of the Canadian Tax Act and any applicable income tax treaty or convention; (2) deals at arm’s length with us; (3) is not affiliated with us; (4) does not use or hold, and is not deemed to use or hold, common shares in a business carried on in Canada; (5) has not entered into, with respect to the common shares, a “derivative forward agreement” or a “synthetic disposition arrangement”, each as that term is defined in the Canadian Tax Act, and (6) holds the common shares as capital property, such holder, a Non-Canadian Holder. Special rules, which are not discussed in this summary, may apply to a Non-Canadian Holder that is an insurer carrying on an insurance business in Canada and elsewhere.
This summary is based on the current provisions of the Canadian Tax Act, and an understanding of the current administrative policies of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals (the “Proposed Amendments”), to amend the Canadian Tax Act and the Canada-United States Tax Convention (1980), as amended, (the “Canada-U.S. Tax Treaty”), publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and assumes that all Proposed Amendments will be enacted in the form proposed. However, no assurances can be given that the Proposed Amendments will be enacted as proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative policy or assessing practice whether by legislative, regulatory, administrative or judicial action nor does it take into account tax legislation or considerations of any province, territory or foreign jurisdiction, which may differ from those discussed herein.
This summary is of a general nature only and is not, and is not intended to be, legal or tax advice to any particular shareholder. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, you should consult your own tax advisor with respect to your particular circumstances.
Generally, for purposes of the Canadian Tax Act, all amounts relating to the acquisition, holding or disposition of the common shares must be converted into Canadian dollars based on the exchange rates as determined in accordance with the Canadian Tax Act. The amount of any dividends required to be included in the income of, and capital gains or capital losses realized by, a Non-Canadian Holder may be affected by fluctuations in the Canadian exchange rate.
Dividends
Dividends paid or credited on the common shares or deemed to be paid or credited on the common shares to a Non-Canadian Holder will be subject to Canadian withholding tax at the rate of 25%, subject to any reduction in the rate of withholding to which the Non-Canadian Holder is entitled under any applicable income tax convention between Canada
77
and the country in which the Non-Canadian Holder is resident. For example, under the Canada-U.S. Tax Treaty, where dividends on the common shares are considered to be paid to or derived by a Non-Canadian Holder that is a beneficial owner of the dividends and is a U.S. resident for the purposes of, and is entitled to benefits of, the Canada-U.S. Tax Treaty, the applicable rate of Canadian withholding tax is generally reduced to 15%.
Dispositions
A Non-Canadian Holder will not be subject to tax under the Canadian Tax Act on any capital gain realized on a disposition or deemed disposition of a Common Share, unless the common shares are “taxable Canadian property” to the Non-Canadian Holder for purposes of the Canadian Tax Act and the Non-Canadian Holder is not entitled to relief under an applicable income tax convention between Canada and the country in which the Non-Canadian Holder is resident.
Generally, the common shares will not constitute “taxable Canadian property” to a Non-Canadian Holder at a particular time provided that the common shares are listed at that time on a “designated stock exchange” (as defined in the Canadian Tax Act), which includes the Nasdaq, unless at any particular time during the 60-month period that ends at that time (i) one or any combination of (a) the Non-Canadian Holder, (b) persons with whom the Non-Canadian Holder does not deal at arm’s length, and (c) partnerships in which the Non-Canadian Holder or a person described in (b) holds a membership interest directly or indirectly through one or more partnerships, has owned 25% or more of the issued shares of any class or series of our capital stock, and (ii) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from one or any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource properties” (as defined in the Canadian Tax Act), (iii) “timber resource properties” (as defined in the Canadian Tax Act), and (iv) options in respect of, or interests in, or for civil law rights in, property in any of the foregoing whether or not the property exists. Notwithstanding the foregoing, in certain circumstances set out in the Canadian Tax Act, common shares could be deemed to be “taxable Canadian property.” Non-Canadian Holders whose common shares may constitute “taxable Canadian property” should consult their own tax advisors.
Canadian Tax Implications for Canadian HoldersConsiderations
The following is a general summary, as of the date hereof, of the principal Canadian federal income tax considerations under the CanadianIncome Tax Act (Canada) and the regulations thereunder (collectively, the “Tax Act”) generally applicable to a holder who acquires, as a beneficial owner acquires, owns, or disposes of common shares issued pursuant toof the offeringCompany and who, at all relevant times, for purposes of the Canadian Tax Act: (a) is resident or deemed to be resident in Canada; (b) holds the common shares as capital property; and (c)(b) deals at arm’s length with the CompanyCompany; and (c) is not affiliated with the Company (a “Holder”). Generally, the common shares will be capital property to a Holder unless they are heldacquired or acquiredheld in the course of carrying on a business or as part of an adventure or concern in the nature of trade. Certain Holders whose common shares do not otherwise qualify as capital property may in certain circumstances make an irrevocable election in accordance with subsection 39(4) of the Canadian Tax Act to have their common shares, and every other “Canadian security” (as defined in the Canadian Tax Act) owned by such Holder in the taxation year of the election and in all subsequent taxation years, deemed to be capital property.
This summary isdoes not applicableapply to a Holder: (a) that is a “financial institution”, as defined in the Tax Act for purposes of the mark-to-market rules; (b) an interest in which is a “tax shelter investment”, as defined in the Canadian Tax Act; (c) that is a “specified financial institution”, as defined in the Canadian Tax Act; (d) that has made an election under the Canadian Tax Act to determine its Canadian tax results in a foreigncurrency other than Canadian currency; (e) that has entered or will enter into a “derivative forward agreement” or a “synthetic disposition arrangement”, each as defined in the Canadian Tax Act, with respect to its common shares; (f) that receives dividends on the common shares under or as part of a “dividend rental arrangement”, as defined in the CanadianTax Act; (g) that is exempt from tax under Part I of the Tax Act; or (g)(h) that is a partnership.
Additional considerations, not discussed herein, may apply to a Holder that (a) is a corporation thatresident in Canada for the purposes of the Tax Act and (b) is, or becomes, or does not deal at arm’s length for purposes of the Canadian Tax Act with a corporation resident in Canada that is or becomes, as part of a transaction or event or series of transactions or events that includes the acquisition of the common shares, controlled by a non-resident corporation or a non-resident person or group of non-resident persons not dealing at arm’s length (comprised of any combination of non-resident corporations, non-resident individuals or non-resident trusts) for purposes of the “foreign affiliate dumping” rules in section 212.3 of the Canadian Tax Act. SuchAll such Holders should consult their own tax advisors.
In addition, this summary does not address the deductibility of interest by a Holder who has borrowed money or otherwise incurred debt in connection with the acquisition of common shares.
This summary is based on the facts set out in this Annual Report, the current provisions of the Canadian Tax Act, all specific proposals to amend the Canadian Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of hereof or(“Canadian Tax Proposals,Proposals”) and an understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency. This summary assumes that all Canadian Tax Proposals will be enacted in the form proposed, however no assurance can be made that the Canadian Tax Proposals will be enacted in the form proposed or at all. This summary is not exhaustive of all possible Canadian federal income tax considerations and, other than the Canadian Tax Proposals, does not take into account or anticipate any changes in law or in administrative
78
policy, or assessing practice, whether by legislative, regulatory, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign incomenon-Canadian tax legislation or considerations, which may differ significantly from the Canadian federal income tax considerations discussed herein.
This summary is of a general nature only and is not exhaustive of all possible Canadian federal income tax considerations applicable to an investment inthe acquisition, ownership or disposition of the common shares. The income and other tax consequences of acquiring, holdingowning or disposing of common shares will vary depending on a Holder’s particular status and circumstances, including the province or territory in which the Holder resides or carries on business.circumstances. This summary is not intended to
76
be, nor should it construed to be, legal or tax advice to any particular Holder. Holders should consult their own tax advisors with respect to an investment inacquiring, holding or disposing of the common shares having regard to their particular circumstances.
Currency Conversion
Generally, for purposes of the Tax Act, all amounts relating to the acquisition, ownership or disposition of the common shares must be converted into Canadian dollars based on the exchange rates as determined in accordance with the Tax Act. The amount of any dividends required to be included in the income of, and capital gains or capital losses realized by, a Holder may be affected by fluctuations in the Canadian exchange rate.
Canadian Holders
The following summary applies to a Holder who, for purposes of the Tax Act, and at all relevant times, is, or is deemed to be, resident in Canada (a “Canadian Holder”). A Canadian Holder whose common shares do not otherwise qualify as capital property may in certain circumstances make an irrevocable election in accordance with subsection 39(4) of the Tax Act to have their common shares, and every other “Canadian security” (as defined in the Tax Act) owned by such Canadian Holder in the taxation year of the election and in all subsequent taxation years, deemed to be capital property. Canadian Holders whose common shares might not otherwise be considered to be capital property should consult their own tax advisors concerning this election.
Dividends on Common Shares
In the case of a Holder who is an individual (excluding certain trusts), dividendsDividends received or deemed to be received on the common shares by a Canadian Holder who is an individual (including certain trusts) will be included in computing the Canadian Holder’s income for the taxation year in which such dividends are received and will be subject to the gross-up and dividend tax credit rules of the Canadian Tax Act that apply to taxable dividends received from “taxable Canadian corporations”. Provided that appropriate designations are made by (as defined in the Company, such dividend will be treated as an “eligible dividend” forTax Act), including the purposes of the Canadian Tax Act and will be subject to an enhanced gross-up and enhanced dividend tax credit in respect of such dividend.dividends designated by the Company as “eligible dividends” in accordance with the Tax Act. There may be limitations on the Company’s ability to designate dividends and deemed dividends as eligible dividends. Dividends received by a Canadian Holder who is an individual (including certain trusts) may result in such Canadian Holder being liable for alternative minimum tax under the Tax Act. Canadian Holders who are individuals should consult their own tax advisors in this regard.
Dividends received or deemed to be received on the common shares by a Canadian Holder that is a corporation will be required to be included in computing the corporation’s income for the taxation year in which such dividends are received, but such dividends will generally be deductible in computing the corporation’s taxable income.income for that taxation year, subject to all relevant restrictions under the Tax Act. In certain circumstances, subsection 55(2) of the Canadian Tax Act will treat a taxable dividend received by a Canadian Holder that is a corporation as proceeds of disposition or a capital gain.gain, rather than a dividend. Canadian Holders that are corporations should consult their own tax advisors having regard to their own circumstances.
A Canadian Holder that is a “private corporation” or a “subject corporation” (each as defined in the Canadian Tax Act) will generally be liable under Part IV of the Canadian Tax Act to pay a refundablefor an additional tax on dividends received or deemed to be received on the common shares to the extent that such dividends are deductible in computing the Canadian Holder’s taxable income. Such additional tax may be refundable in certain circumstances. A Canadian Holder that is, throughout the relevant taxation year, a “Canadian-controlled private corporation” as defined in the Tax Act or a “substantive CCPC” as proposed to be defined in the Tax Act as announced in the Federal Budget released by the government of Canada on April 7, 2022 (“Budget 2022”), may be liable to pay an additional tax, refundable in certain circumstances, on its “aggregate investment income” which is defined in the Tax Act to include dividends to the extent that such dividends are not deductible in computing the Canadian Holder’s taxable income for the taxation year.
Dividends received by a Holder who is an individual (excluding certain trusts) may result in such Holder being liable for minimum tax under the Canadian Tax Act. Holders who are individuals should consult their own tax advisors in this regard.
Dispositions of Common Shares
OnGenerally, on the disposition or deemed disposition of common shares by a Canadian Holder, the Canadian Holder will generally realize a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition in respect of such common shares, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of the common shares to the Canadian Holder immediately before the disposition or deemed disposition. Such capital gain (or capital loss) will be subject to the tax treatment described under “Taxation of Capital Gains and Capital Losses.”
The adjusted cost base to the Canadian Holder of a common share acquired pursuant to this offering will be determined at any particular time by averaging the cost of such common share with the adjusted cost base of the other common shares owned by the Canadian Holder as capital property at that time.time and by making certain other adjustments required under the Tax Act.
Taxation of Capital Gains and Capital Losses
Generally, one-half of the amount of any capital gain or a taxable(a “taxable capital gain,gain”), realized by a Canadian Holder on a disposition of common shares in a taxation year must be included in computing such Canadian Holder’s income for that year, and one-half of any capital loss or an allowable(an “allowable capital loss,loss”), realized by a Canadian Holder on a disposition of common shares in a taxation year must be deducted from any taxable capital gains realized by the Canadian Holder in the year, subject to and in accordance with the provisions
77
of the Canadian Tax Act. Allowable capital losses in excess of taxable capital gains realized in a taxation year may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any followingsubsequent taxation year against net taxable capital gains realized in such years, subject to and in accordance with the provisions of the Canadian Tax Act.
The amount of any capital loss realized by a Canadian Holder that is a corporation on the disposition or deemed disposition of a common share may be reduced by the amount of any dividends received (or deemed to be received) by the Canadian Holder on such common share to the extent and under the circumstances prescribed by the Canadian Tax Act. Similar rules may apply where a common share is owned by a partnership or trust of which a corporation, trust or partnership is a member or beneficiary. Such Canadian Holders should consult their own tax advisors.
79
A taxable capital gain realized by a Canadian Holder who is an individual or trust (other than(including certain specified trusts) may give rise to a liability for alternative minimum tax.
A Canadian Holder that is throughout the relevant taxation year a “Canadian-controlled private corporation” (as defined in the Tax Act) or a “substantive-CCPC” (as proposed to be defined in the Tax Act as announced in Budget 2022) may be liable to pay an additional tax on certain investment income, including taxable capital gains (but excluding dividends or deemed dividends deductible in computing taxable income). Such additional tax may be refundable in certain circumstances.
Non-Canadian Holders
The following summary applies to a Holder who, for purposes of the Tax Act and any relevant income tax treaty or convention, at all relevant times, (a) is not (and is not deemed to be) resident in Canada and (b) will not use or hold (and will not be deemed to use or hold) the common shares in, or in the course of carrying on a business or part of a business in Canada (a “Non-Canadian Holder”). This summary does not apply to a Non-Canadian Holder that carries on an insurance business in Canada and elsewhere or an “authorized foreign bank” (as defined in the Tax Act).
Dividends on Common Shares
Dividends paid or credited on the common shares or deemed to be paid or credited on the common shares to a Non-Canadian Holder will generally be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividend, subject to any reduction in the rate of withholding to which the Non-Canadian Holder may be entitled under an applicable income tax convention between Canada and the country in which the Non-Canadian Holder is resident. For example, under the Canada United States Tax Convention (1980), as amended (the “Canada-U.S. Tax Treaty”), where dividends on the common shares are considered to be paid to or derived by a Non-Canadian Holder that is a beneficial owner of the dividends and is a U.S. resident for the purposes of, and is fully entitled to benefits of, the Canada-U.S. Tax Treaty, the applicable rate of Canadian withholding tax is generally reduced to 15%.
Dispositions of Common Shares
A Non-Canadian Holder will not be subject to tax under the Tax Act on any capital gain realized on a disposition or deemed disposition of common shares, nor will capital losses arising from the disposition, or deemed disposition, of a common shares, be recognized under the Tax Act, unless at the time of disposition the common shares are “taxable Canadian property” to the Non-Canadian Holder for purposes of the Tax Act and the Non-Canadian Holder is not entitled to relief under an applicable income tax convention between Canada and the country in which the Non-Canadian Holder is resident.
Generally, the common shares will not constitute “taxable Canadian property” to a Non-Canadian Holder at a particular time provided that the common shares are listed at that time on a “designated stock exchange” (as defined in the Tax Act), which includes the Nasdaq, unless at any particular time during the 60-month period immediately preceding such time: (i) at least 25% or more of the issued shares of any class or series of the capital stock of the Company was owned by or belonged to any combination of (A) the Non-Canadian Holder, (B) persons with whom the Non-Canadian Holder does not deal at arm’s length, and (C) partnerships in which the Non-Canadian Holder or a person described in (b) holds a membership interest directly or indirectly through one or more partnerships, and (ii) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from one or any combination of: (a) real or immoveable property situated in Canada, (b) “Canadian resource properties” (as defined in the Tax Act), (c) “timber resource properties” (as defined in the Tax Act), and (d) options in respect of, or interests in, or for civil law rights in, property in any of the foregoing whether or not the property exists. Notwithstanding the foregoing, in certain circumstances set out in the Tax Act, common shares could be deemed to be “taxable Canadian property.” Non-Canadian Holders whose common shares may constitute “taxable Canadian property” should consult their own tax advisors.
In the event that the common shares constitute taxable Canadian property of a Non-Canadian Holder and any capital gain that would be realized on the disposition therefor is not exempt from tax under the Tax Act or pursuant to an applicable income tax treaty or convention, the Canadian income tax consequences discussed above under “Canadian Holders – Dispositions of Common Shares” and “Canadian Holders – Taxation of Capital Gains and Capital Losses” will generally apply to the Non-Canadian Holder.
Not applicable
78
Not applicable
We are a "foreign“foreign private issuer"issuer” as such term is defined in Rule 405 under the Securities Act and Rule 3b-4 under the Exchange Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws.
Copies of our financial statements and other continuous disclosure documents required under Canadian securities laws are available for viewing on SEDAR at www.sedar.com.
We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this Annual Report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: #200,#300, 919 - 11 Avenue SW Calgary, AB, T2R 1P3 Attention: Jayson Moss,Sophie Pilon, phone number: +1 844-879-8337587-327-2017.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
See the section entitled “Selected Annual Information—“Liquidity and Capital Resources—Liquidity risks associated with financial instruments—Interest rate risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
Credit Risk
See the section entitled “Selected Annual Information—“Liquidity and Capital Resources—Liquidity risks associated with financial instruments—Credit risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
Liquidity Risk
See the section entitled “Selected Annual Information—“Liquidity and Capital Resources—Liquidity risks associated with financial instruments—Liquidity risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
Foreign Currency Risk
See the section entitled “Selected Annual Information—“Liquidity and Capital Resources—Liquidity risks associated with financial instruments—Foreign currency risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
80
Item 12. Description of SecuritiesSecurities Other than Equity Securities.
8179
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
A. – D. Material Modifications to the Rights of Security Holders
None.
E. Use of Proceeds
The effective date of the registration statement (File no. 333-232573) for the IPO of our common shares was July 31, 2019. The offering closed on August 6, 2019. Cowen and Company, LLC, BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. were joint bookrunning managers for the offering, and Barclays Capital Canada Inc., CIBC World Markets Inc. and Scotia Capital Inc. were co-managers for the offering. We registered 11,000,000 common shares in the offering and granted the underwriters a 30-day over-allotment option, which was not exercised, to purchase up to 1,650,000 additional common shares from us to cover over-allotments. The net offering proceeds to us from the offering, after deducting the underwriting commission and offering expenses, were approximately $183.8 million. There has been no material change in the planned use of proceeds from our IPO from that described in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on July 31, 2019.Not applicable.
None of the net proceeds of the offering was paid directly or indirectly to any director, officer, general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.
Item 15. Controls and Procedures.
See the section titled “Disclosure Controls and Procedures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.
Item 16A. Audit Committee Financial Expert.
The Company’s audit committee is comprised of Greg Mills and Elizabeth Cannon,Lori Ell, and chaired by Bryan Pinney. Our board of directors has determined that each of Greg Mills, Elizabeth CannonLori Ell and Bryan Pinney is financially literate and meets the independence requirements for directors, including the heightened independence standards for members of the audit committee under Rule 10A-3 under the Exchange Act and NI 52-110. Our board of directors has determined that Bryan Pinney is “financially sophisticated” within the meaning of the Nasdaq Rules, “financially literate” within the meaning of NI 52-110, and a “financial expert” as defined by Rule 10A-3 under the Exchange Act. For information relating to qualifications and experience of each audit committee member, see “Item 6 Compensation—6B Directors, Senior Management and Employees”Employees—Compensation”.
The Company’s board of directors has adopted a code of conduct applicable to all of our directors and employees, including our Chief Executive Officer and Chief Financial Officer. This code qualifies as a “code of ethics” as defined in section 406(c) of SOX and which is a “code” under NI 58-101. The Company’s code of conduct is available at www.sndlgroup.com. Information contained on, or that can be accessed through, the Company’s website is not incorporated by reference into this Annual Report.
If we make any amendment to the code of conduct or grant any waiver therefrom, whether explicit or implicit, to a director or executive officer, we will disclose the nature of such amendment or waiver on our website to the extent required by, and in accordance with, the rules and regulations of the SEC and the Canadian securities regulatory authorities.
Item 16C. Principal Accountant Fees and Services.
The following table summarizes the fees charged by KPMG (Calgary, Alberta, Canada; Auditor Firm ID: 85), the Company’s independent auditor, in the fiscal years ended December 31, 20192021 and December 31, 2018:2021:
82
|
| |||
Fees billed for the fiscal year ended
| Fees billed for the fiscal year ended
| |||
Service Retained | December 31, 2019
| December 31, 2018
| December 31, 2021
| December 31, 2020
|
Audit fees(1) | $2,120,500 | $66,875 | ||
Audit-related fees(2) | 240,750 | — | ||
Tax fees(3) | 148,450 | — | ||
Audit fees(1) | $2,800,190 | $1,423,635 | ||
Audit-related fees(2) | — | |||
Tax fees(3) | — | 3,317 | ||
All other fees | — | — |
(1) | “Audit fees” include fees necessary to perform the annual audit or reviews of the consolidated financial |
(2) | “Audit-related fees” include fees for assurance and related services by our independent auditor that are reasonably related to the performance of the audit or review of our financial statements other than those included in “Audit Fees”. |
(3) | “Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax advice and tax planning. |
The audit committee is responsible for the pre-approval of all non-audit services to be provided by the Company’s auditor.
80
Item 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
Item 16F. Change in Registrant’s Certifying Accountant.
Not applicable.On April 7, 2022, the Company received notice of the decision of KPMG LLP (“KPMG”) to not stand for reappointment as the Company’s independent auditor for fiscal year 2022 at its upcoming annual general meeting of shareholders. KPMG’s decision not to stand for reappointment as the Company’s independent auditor was considered and approved by the Company’s audit committee and board of directors. The Company’s audit committee is in the process of selecting a new independent registered public accounting firm to serve as its auditor and will engage such firm as soon as reasonably practicable.
For the years ended December 31, 2021 and December 31, 2020, no report by KPMG on the Company’s consolidated financial statements contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.
For the years ended December 31, 2021 and December 31, 2020 and through the date hereof, (i) there were no disagreements (as that term is used in Item 16F(a)(1)(iv) of Form 20-F and the related instructions) between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference thereto in its reports upon on the Company’s audited consolidated financial statements for the years ended December 31, 2021 and December 31, 2020, and (ii) there were no “reportable events” as such term is defined in Item 16F(a)(1)(v) of Form 20-F, other than the material weaknesses in the Company’s internal control over financial reporting (i) disclosed in the section titled “Disclosure Controls and Procedures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1 and (ii) previously disclosed in the section titled “Disclosure Controls and Procedures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached as Exhibit 15.1 to the Company’s annual report on Form 20-F for the year ended December 31, 2020, filed with the SEC on March 18, 2021.
The Company has provided a copy of this disclosure to KPMG and requested that they furnish it with a letter addressed to the SEC stating whether KPMG agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from KPMG addressed to the SEC, dated the date hereof, is being filed herewith.
Item 16G. Corporate Governance.
The Nasdaq Rules include certain accommodations in the corporate governance requirements that allow foreign private issuers, such as us, to follow “home country” corporate governance practices in lieu of the otherwise applicable corporate governance standards of the Nasdaq. The application of such exceptions requires that we disclose any significant ways in which our corporate governance practices differ from the Nasdaq Rules that we do not follow. WhenAlthough our shares are listed on the Nasdaq, we intend to continue to follow Canadian corporate governance practices in lieu of the requirement under Rule 5620(c) of the Nasdaq Rules that a company’s bylaws provide for a quorum for any meeting of the holders of the company’s common shares that is not less than 33 1/3% of the outstanding common shares of the company. Our by-laws provide that a quorum of shareholders is constituted by the holders of at least 25% of the shares entitled to vote at the meeting, present in person or represented by proxy, and at least two persons entitled to vote at the meeting, present in person or represented by proxy. In addition, we do not intend to follow Rule 5635 of the Nasdaq Rules that requires that shareholder approval be required for the Company to issue securities in connection with certain events, such as the acquisition of shares or assets of another company, the establishment of or amendments to equity-based compensation plans for employees, rights issues at or below market price, certain private placements, directed issues at or above market price and issuance of convertible notes. Neither Canadian securities laws nor Alberta corporate law require shareholder approval for such transactions, except where such transactions constitute a “related party transaction” or “business combination” under Canadian securities laws or where such transaction is structured in a way that requires shareholder approval under the ABCA, in which case, we intend to follow our home country requirements.
Item 16H. Mine Safety Disclosure
Not applicable.
83
Item 17. Financial Statements.
See Item 18. – “Financial Statements.”
Item 18. Financial Statements.
Our Annual Financial Statements are included at the end of this Annual Report.
List all exhibits filed as part of the registration statement or annual report, including exhibits incorporated by reference.
Exhibit Number |
| Description | Method of Filing |
|
|
|
|
1.1 |
| Articles of incorporation of Sundial Growers Inc., as currently in effect | Incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-8, filed with the SEC on August 9, 2019
|
1.2 |
| Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019 | |
| |||
2.1 |
| Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019
| |
|
|
| Incorporated by reference to Exhibit 2.4 to the Registrant’s annual report on Form 20-F, filed with the SEC on March 31, 2020 |
2.3 | Incorporated by reference to Exhibit 99.5 to the Registrant’s current report on Form 6-K, filed with the SEC on June 8, 2020 | ||
2.4 | Incorporated by reference to Exhibit 99.1 to the Registrant’s current report on Form 6-K, filed with the SEC on
| ||
|
|
|
|
|
| Incorporated by reference to Exhibit | |
|
|
| |
|
| ||
|
| ||
|
|
| |
| Incorporated by reference to Exhibit 99.1 to the Registrant’s current report on Form 6-K, filed with the SEC on
|
84
4.2† |
|
| |
4.3† |
| Incorporated by reference to Exhibit 99.3 to the Registrant’s current report on Form 6-K, filed with the SEC on January 20, 2021 |
82
4.5† | Incorporated by reference to Exhibit 99.4 to the Registrant’s current report on Form 6-K, filed with the SEC on January 20, 2021 | ||
4.6 | Incorporated by reference to Exhibit 99.1 to the Registrant’s current report on Form 6-K, filed with the SEC on January 21, 2021 | ||
8.1 |
| Filed together with this Annual Report on Form 20-F for the year ended December 31, | |
12.1 |
| Filed together with this Annual Report on Form 20-F for the year ended December 31, | |
12.2 |
|
| Filed together with this Annual Report on Form 20-F for the year ended December 31, |
13.1 |
|
| Filed together with this Annual Report on Form 20-F for the year ended December 31, |
13.2
|
|
| Filed together with this Annual Report on Form 20-F for the year ended December 31, |
15.1 |
| Management’s Discussion and Analysis of Financial Condition and Results of
| Filed together with this Annual Report on Form 20-F for the year ended December 31, |
16.1 | Letter from KPMG LLP regarding Changes in Registrant’s Certifying Accountant | Filed together with this Annual Report on Form 20-F for the year ended December 31, 2021 | |
23.1 | Filed together with this Annual Report on Form 20-F for the year ended December 31, 2021 | ||
101.INS |
| XBRL Instance Document |
|
|
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
| Portions of this exhibit have been omitted pursuant to Item 601(a)(6), Item 601(b)(2)(ii) or Item 601(b)(10)(iv), as applicable, of Regulation S-K under the Securities Act of 1933, as amended, because they are both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed or include information the disclosure of which would constitute a clearly unwarranted invasion of personal privacy. | |
85
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
| Sundial Growers Inc. | |
|
|
|
|
Date: |
| By: | /s/ Zachary George |
|
|
| Name: Zachary George |
|
|
| Title: Chief Executive Officer |
86
Report of Independent RegisteredRegistered Public Accounting Firm
To the Shareholders and Board of Directors
of Sundial Growers Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Sundial Growers Inc. and subsidiaries (the Company)“Company”) as of December 31, 20192021 and 2018,2020, the related consolidated statements of loss and comprehensive loss, changes in shareholder’sshareholders’ equity, and cash flows for each of the year ended December 31, 2019,years in the ten monththree-year period ended December 31, 2018 and the year ended February 28, 2018,2021, and the related notes (collectively, the consolidated“consolidated financial statements)statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and its financial performance and its cash flows for each of the year ended December 31, 2019,years in the ten monththree-year period ended December 31, 2018 and the year ended February 28, 2018,2021 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Going Concern
The accompanying consolidated financial statementsWe also have been prepared assuming thataudited, in accordance with the standards of the Public Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company was in breach of its debt covenants, has recurring losses and has a history of negative cash flows from operating activities. These conditions, along with other matters discussed in Note 1, raises substantial doubt aboutAccounting Oversight Board (United States) (PCAOB), the Company’s ability to continueinternal control over financial reporting as a going concern. Management’s plansof December 31, 2021, based on criteria established in regard to these matters are also described in Note 1. The consolidatedInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 27, 2022 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial statements do not include any adjustments that might result from the outcome of this uncertainty.reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Equity-Accounted Investee
As described in note 17 to the consolidated financial statements, the Company’s underlying investments in its equity-accounted investee as of December 31, 2021, are recorded at fair value through profit and loss. On March 15, 2021 the Company entered into a joint venture through a new corporation called SunStream Bancorp Inc. (the “Joint Venture”) with a capital contribution of $396.6 million. The Joint Venture’s principal business is making indirect investments in the global cannabis sector. The Company records its interest in the Joint Venture using the equity method. The Joint Venture records its investments at fair value through profit and loss each reporting period. The valuation of the investments held by the Joint Venture requires estimates including market prices, volatility and discount rates. The Joint Venture engaged valuation professionals to assess the fair value of the investments.
We identified the Joint Venture’s measurement of the fair value of its investments as a critical audit matter. A high degree of subjectivity and auditor judgment was required to evaluate the Joint Venture’s estimates of market prices, volatility and discount rates used to calculate the fair value of its investments. Minor changes to these estimates could have a significant effect on the Joint Venture’s calculation of the fair value of its investments, and as a result, the carrying value of the Joint Venture. Additionally, the audit effort associated with these estimates required valuation professionals with specialized skills and knowledge.
F-1
The following are the primary procedures we performed to address this critical audit matter. We evaluated the competence, capabilities and objectivity of the valuation professionals engaged by the Joint Venture to assess the fair value of the investments. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
• | evaluating the Joint Venture’s methodologies used in estimating the fair value of the investments, |
• | evaluating the Joint Venture’s estimates of market prices, volatility and discount rates by comparing to publicly available market data for comparable entities, and |
• | developing a range of independent estimates and comparing them to the fair value of the investments determined by the Joint Venture. |
Valuation of Investment at Fair Value Through Profit and Loss
As described in note 16 to the consolidated financial statements, the Company has a special purpose vehicle that owns an investment in Zenabis Investments Ltd., which is recorded at fair value through profit and loss. The carrying value of the investment is $48.6 million as of December 31, 2021. The valuation of the investment requires estimates including the discount rate. The Company engaged valuation professionals to assess the fair value of the investment.
We identified the measurement of the fair value of the investment as a critical audit matter. A high degree of subjectivity and auditor judgment was required to evaluate the estimate of the discount rate used to determine the fair value of the investment. Minor changes to this estimate could have a significant effect on the fair value of the investment. Additionally, the audit effort associated with this estimate required valuation professionals with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the competence, capabilities and objectivity of the valuation professionals engaged by the Company to assess the fair value of the investment. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in:
• | evaluating the methodology used in estimating the fair value of the investment, |
• | evaluating the estimate of the discount rate by comparing to publicly available market data for comparable entities, and |
• | developing a range of independent estimates and comparing them to the fair value of the investment determined by the Company. |
Impairment of the Olds Cash Generating Unit
As discussed in notes 3 and 13 to the consolidated financial statements, the Company’s long-lived assets, including interests in equity-accounted investees, are assessed for impairment indicators at each reporting period end to determine whether there is an indication that such assets have experienced impairment. The Company identified an indicator of impairment at June 30, 2021 for the Olds cash generating unit (“CGU”) arising from the curtailment in the utilization of the capacity of the Olds facility, and as a result performed an impairment test to estimate the recoverable amount of its long-lived assets using discounted expected future cash flows. The Company recorded an asset impairment charge of $60 million. The estimated recoverable amount involves estimates, including the forecasted cash flows, terminal multiple and the discount rate.
We identified the evaluation of the calculation of the recoverable amount of the Olds CGU at June 30, 2021 to be a critical audit matter. A high degree of subjectivity and auditor judgment was required to evaluate the forecasted cash flows, including total addressable market, (“TAM”), market share escalation factor, gross margin escalation factor, terminal multiple and discount rate used to calculate the recoverable amount of the Olds CGU. Minor changes in these estimates could have a significant effect on the Company’s calculation of the recoverable amount of the Olds CGU. Additionally, the nature and extent of audit effort associated with these estimates required the involvement of valuation specialists with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the forecasted cash flows, TAM and market share escalation factor by comparing to historical results and publicly available capital market analyst reports. We evaluated the gross margin escalation factor by comparing to the Company’s historical gross margin growth of the Olds CGU and to the Company’s budgets and forecasts. We evaluated the Company’s budgets and forecasts by assessing the Company’s intent and ability to carry out particular course of actions, which included consideration of whether the Company has the financial resources and other means to carry out the actions. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
• | evaluating the methodology used in calculating the recoverable amount, |
• | evaluating the Company’s terminal multiple by comparing to the long-term nominal gross domestic product forecasts in Canada, and |
• | evaluating the Company’s determination of the discount rate by comparing to publicly available market data for comparable entities. |
We have served as the Company’s auditor since 2018.
/s/ KPMG LLP
Chartered Professional Accountants
Calgary, Alberta
March 30,April 27, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Sundial Growers Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Sundial Growers Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2021 and 2020, the related consolidated statements of loss and comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated April 27, 2022 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
• | An ineffective control environment resulting from an insufficient number of financial reporting and accounting, and information technology (IT) personnel with the appropriate knowledge, experience or training commensurate with the Company’s financial reporting requirements. |
• | The insufficient number of personnel described above contributed to an ineffective risk assessment process necessary to identify changes to its operations and to identify all relevant risks of material misstatement and to evaluate the implications of relevant risks on its internal control over financial reporting. |
• | An ineffective information and communication process resulting from a combination of deficiencies within its information technology general and application controls (“ITGCs”) across the systems supporting the Company’s financial reporting process, including access controls and administrator-level access resulting in a lack of segregation of duties, resulting in insufficient controls to ensure the relevance, timeliness and quality of information used in control activities. |
• | As a consequence of the above and as a result of inadequate segregation of duties and secondary review, the Company had ineffective control activities related to the design, implementation and operating effectiveness of process level and financial reporting controls which had a pervasive impact on the Company's internal control over financial reporting. |
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
The Company acquired Inner Spirit Holdings Ltd. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as at December 31, 2021, Inner Spirit Holdings Ltd.’s internal control over financial reporting associated with 1% of current assets, 21% of long-term assets, 15% of current liabilities, 51% of long-term liabilities, 24% of total gross revenues and 0% of loss included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Inner Spirit Holdings Ltd.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Internal Control over Financial Reporting found in Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
F-4
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chartered Professional Accountants
Calgary, Canada
April 27, 2022
F-1
Sundial Growers Inc.
Consolidated Financial Statements
As at and forFor the yearyears ended December 31, 2019,
ten months ended December 31, 2 018
2021 and the year ended February 28, 20182020, and 2019
(Expressed in thousands of Canadian dollars)
F-1
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
As at | Note | December 31, 2019 |
| December 31, 2018 |
| Note | December 31, 2021 |
| December 31, 2020 (1) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| 45,337 |
|
| 14,121 |
|
|
| 558,251 |
|
| 60,376 |
|
Restricted cash | 13(a) |
| 15,827 |
|
| 350 |
| 8 |
| 27,013 |
|
| 5,333 |
|
Marketable securities | 9 |
| 83,724 |
|
| — |
| |||||||
Accounts receivable | 7 |
| 27,638 |
|
| 2,738 |
| 10 |
| 10,865 |
|
| 15,898 |
|
Biological assets | 8 |
| 14,309 |
|
| 876 |
| 11 |
| 4,410 |
|
| 3,531 |
|
Inventory | 9 |
| 59,942 |
|
| 1,234 |
| 12 |
| 29,503 |
|
| 25,613 |
|
Prepaid expenses and deposits |
|
| 9,564 |
|
| 2,390 |
|
|
| 4,355 |
|
| 4,622 |
|
Investments | 16 |
| 3,065 |
|
| — |
| |||||||
Assets held for sale | 13 |
| 2,998 |
|
| 2,998 |
| |||||||
Net investment in subleases | 14 |
| 3,991 |
|
| — |
| |||||||
|
|
| 172,617 |
|
| 21,709 |
|
|
| 728,175 |
|
| 118,371 |
|
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deposits |
|
| 7,725 |
|
| 2,633 |
| |||||||
Property, plant and equipment | 10 |
| 281,984 |
|
| 88,491 |
| 13 |
| 63,189 |
|
| 116,928 |
|
Net investment in subleases | 14 |
| 22,571 |
|
| — |
| |||||||
Intangible assets | 5,11 |
| 43,995 |
|
| — |
| 15 |
| 4,709 |
|
| 5,063 |
|
Investments | 16 |
| 70,498 |
|
| 51,876 |
| |||||||
Equity-accounted investees | 17 |
| 412,858 |
|
| — |
| |||||||
Goodwill | 5 |
| 11,440 |
|
| — |
| 5 |
| 114,537 |
|
| — |
|
Total assets |
|
| 510,036 |
|
| 110,200 |
|
|
| 1,424,262 |
|
| 294,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities | 12 |
| 58,110 |
|
| 19,324 |
| 18 |
| 38,452 |
|
| 23,308 |
|
Current portion of long-term debt | 13,24 |
| 177,913 |
|
| 22,477 |
| |||||||
Convertible notes | 15 |
| — |
|
| 25,449 |
| |||||||
Current portion of lease obligations | 16 |
| 722 |
|
| 44 |
| 20 |
| 5,701 |
|
| 409 |
|
Contingent consideration | 5(a) |
| 32,501 |
|
| — |
| |||||||
Current portion of financial obligations | 17 |
| — |
|
| 2,364 |
| |||||||
Derivative warrants | 19 |
| 21,700 |
|
| 428 |
| |||||||
|
|
| 269,246 |
|
| 69,658 |
|
|
| 65,853 |
|
| 24,145 |
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt | 13,24 |
| — |
|
| 32,159 |
| |||||||
Lease obligations | 16 |
| 16,227 |
|
| 170 |
| 20 |
| 27,769 |
|
| 1,031 |
|
Deferred tax liability | 18 |
| 3,365 |
|
| — |
| |||||||
Financial obligation | 17 |
| — |
|
| 16,121 |
| |||||||
Other liabilities | 21 |
| 4,505 |
|
| — |
| |||||||
Total liabilities |
|
| 288,838 |
|
| 118,108 |
|
|
| 98,127 |
|
| 25,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital | 19(b) |
| 509,654 |
|
| 65,133 |
| 23(b) |
| 2,035,704 |
|
| 762,046 |
|
Warrants | 19(c) |
| 27,831 |
|
| 3,108 |
| 23(c) |
| 8,092 |
|
| 6,138 |
|
Contributed surplus | 19(d) |
| 30,192 |
|
| 9,493 |
|
|
| 60,734 |
|
| 59,344 |
|
Convertible notes – equity component | 15 |
| — |
|
| 3,232 |
| |||||||
Contingent consideration | 5(b) |
| 2,279 |
|
| — |
| 17(b) |
| 2,279 |
|
| 2,279 |
|
Accumulated deficit |
|
| (360,338 | ) |
| (88,874 | ) | |||||||
Accumulated deficit (1) |
|
| (788,510 | ) |
| (558,128 | ) | |||||||
Accumulated other comprehensive income |
|
| 6,866 |
|
| — |
|
|
| 7,607 |
|
| — |
|
Total shareholders’ equity |
|
| 216,484 |
|
| (7,908 | ) |
|
| 1,325,906 |
|
| 271,679 |
|
Non-controlling interest | 5 |
| 4,714 |
|
| — |
| |||||||
Non-controlling interest (1) |
|
| 229 |
|
| (1,984 | ) | |||||||
Total liabilities and shareholders’ equity |
|
| 510,036 |
|
| 110,200 |
|
|
| 1,424,262 |
|
| 294,871 |
|
Going concern (note 1)
(1) | Recast – refer to note 17(b). |
Commitments (note 29)35)
Subsequent events (notes 5, 28, 30)17(a), 24(c) and 36)
See accompanying notes to the consolidated financial statements.
Approved by the Board: |
|
|
“Signed” Bryan Pinney |
| “Signed” Zachary George |
Director |
| Director |
F-2
Consolidated Statements of Loss and Comprehensive Loss
(Expressed in thousands of Canadian dollars, except per share amounts)
|
|
|
| Year ended December 31 |
|
| Ten months ended December 31 |
|
| Year ended February 28 |
|
|
|
| Year ended December 31 |
| ||||||||||||
|
| Note |
| 2019 |
|
| 2018 |
|
| 2018 |
|
| Note |
| 2021 |
|
| 2020 (1) |
|
| 2019 |
| ||||||
Gross revenue |
| 21 |
|
| 79,225 |
|
|
| — |
|
|
| — |
|
| 25 |
|
| 67,279 |
|
|
| 73,321 |
|
|
| 66,927 |
|
Excise taxes |
|
|
|
| 3,365 |
|
|
| — |
|
|
| — |
|
|
|
|
| 11,151 |
|
|
| 12,403 |
|
|
| 3,365 |
|
Net revenue |
|
|
|
| 75,860 |
|
|
| — |
|
|
| — |
|
|
|
|
| 56,128 |
|
|
| 60,918 |
|
|
| 63,562 |
|
Cost of sales |
|
|
|
| 56,147 |
|
|
| — |
|
|
| — |
|
| 12 |
|
| 48,601 |
|
|
| 51,740 |
|
|
| 46,721 |
|
Inventory obsolescence |
| 12 |
|
| 16,978 |
|
|
| 45,913 |
|
|
| — |
| ||||||||||||||
Gross margin before fair value adjustments |
|
|
|
| 19,713 |
|
|
| — |
|
|
| — |
|
|
|
|
| (9,451 | ) |
|
| (36,735 | ) |
|
| 16,841 |
|
Change in fair value of biological assets |
|
|
|
| 30,726 |
|
|
| (1,280 | ) |
|
| 366 |
|
| 11 |
|
| 4,708 |
|
|
| 5,432 |
|
|
| 30,340 |
|
Change in fair value of biological assets realized through inventory sold |
|
|
|
| (10,685 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Change in fair value realized through inventory |
|
|
|
| (2,247 | ) |
|
| (18,566 | ) |
|
| (10,685 | ) | ||||||||||||||
Gross margin |
|
|
|
| 39,754 |
|
|
| (1,280 | ) |
|
| 366 |
|
|
|
|
| (6,990 | ) |
|
| (49,869 | ) |
|
| 36,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Interest and fee revenue |
| 26 |
|
| 13,149 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Investment loss |
| 26 |
|
| (44,501 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Share of profit of equity-accounted investees |
| 17(a) |
|
| 32,913 |
|
|
| — |
|
|
| — |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
| 22 |
|
| 44,449 |
|
|
| 8,309 |
|
|
| 3,144 |
|
| 27 |
|
| 38,370 |
|
|
| 32,029 |
|
|
| 38,934 |
|
Sales and marketing |
| 22 |
|
| 8,888 |
|
|
| 2,380 |
|
|
| 1,274 |
|
| 27 |
|
| 5,043 |
|
|
| 5,737 |
|
|
| 8,068 |
|
Research & development |
|
|
|
| 2,410 |
|
|
| 275 |
|
|
| 413 |
| ||||||||||||||
Pre-production expenses |
|
|
|
| — |
|
|
| 6,457 |
|
|
| 1,249 |
| ||||||||||||||
Research and development |
|
|
|
| 2,446 |
|
|
| 488 |
|
|
| 2,410 |
| ||||||||||||||
Depreciation and amortization |
|
|
|
| 4,077 |
|
|
| 920 |
|
|
| 411 |
|
| 13,15 |
|
| 4,726 |
|
|
| 4,711 |
|
|
| 595 |
|
Foreign exchange loss |
|
|
|
| (840 | ) |
|
| 141 |
|
|
| — |
| ||||||||||||||
Share-based compensation |
| 20 |
|
| 39,524 |
|
|
| 7,410 |
|
|
| 4,576 |
|
| 24 |
|
| 12,307 |
|
|
| 8,566 |
|
|
| 38,698 |
|
Restructuring costs |
|
|
|
| 874 |
|
|
| 6,470 |
|
|
| — |
| ||||||||||||||
Asset impairment |
| 10 |
|
| 162 |
|
|
| 523 |
|
|
| 2,184 |
|
| 13 |
|
| 60,000 |
|
|
| 79,191 |
|
|
| 162 |
|
Goodwill impairment |
| 5(b) |
|
| 100,305 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Government subsidies |
| 28 |
|
| (2,180 | ) |
|
| (4,128 | ) |
|
| — |
| ||||||||||||||
Loss on cancellation of contracts |
|
|
|
| 5,116 |
|
|
| 2,471 |
|
|
| — |
| ||||||||||||||
Loss from operations |
|
|
|
| (159,221 | ) |
|
| (27,695 | ) |
|
| (12,885 | ) |
|
|
|
| (132,131 | ) |
|
| (185,404 | ) |
|
| (52,371 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs |
| 5(a) |
|
| (10,069 | ) |
|
| — |
|
|
| — |
|
|
|
|
| (17,566 | ) |
|
| (3,587 | ) |
|
| (8,481 | ) |
Finance costs |
| 23 |
|
| (28,198 | ) |
|
| (1,797 | ) |
|
| (75 | ) | ||||||||||||||
Finance costs, net |
| 29 |
|
| (3,756 | ) |
|
| (3,819 | ) |
|
| (24,216 | ) | ||||||||||||||
Change in estimate of fair value of derivative warrants |
| 19 |
|
| (77,834 | ) |
|
| (12,995 | ) |
|
| — |
| ||||||||||||||
Foreign exchange gain (loss) |
|
|
|
| 531 |
|
|
| (1,000 | ) |
|
| (939 | ) | ||||||||||||||
Loss on financial obligation |
| 17 |
|
| (60,308 | ) |
|
| (27,017 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| (60,308 | ) |
Gain (loss) on disposition of PP&E |
|
|
|
| 21 |
|
|
| (17 | ) |
|
| (35 | ) |
|
|
|
| 235 |
|
|
| 488 |
|
|
| 8 |
|
Change in fair value of contingent consideration |
| 5(a) |
|
| (18,645 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Change in fair value of investment |
|
|
|
| 165 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Other expenses |
| 17(b) |
|
| (1,932 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Loss before income tax |
|
|
|
| (276,255 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) |
|
|
|
| (232,453 | ) |
|
| (206,317 | ) |
|
| (146,307 | ) |
Income tax recovery |
| 5(c),18 |
|
| 4,626 |
|
|
| — |
|
|
| — |
|
| 22 |
|
| 2,271 |
|
|
| — |
|
|
| 3,609 |
|
Net loss from continuing operations |
|
|
|
| (230,182 | ) |
|
| (206,317 | ) |
|
| (142,698 | ) | ||||||||||||||
Net loss from discontinued operations |
| 6 |
|
| — |
|
|
| (33,627 | ) |
|
| (128,931 | ) | ||||||||||||||
Net loss |
|
|
|
| (271,629 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) |
|
|
|
| (230,182 | ) |
|
| (239,944 | ) |
|
| (271,629 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on currency translation of foreign operations |
| 5(a) |
|
| 6,866 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Equity-accounted investees - share of OCI, net of tax |
| 17(a) |
|
| 7,607 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Gain on translation of foreign operations |
|
|
|
| — |
|
|
| 600 |
|
|
| 6,866 |
| ||||||||||||||
Comprehensive loss |
|
|
|
| (264,763 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) |
|
|
|
| (222,575 | ) |
|
| (239,344 | ) |
|
| (264,763 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Sundial Growers Inc. (1) |
|
|
|
| (230,382 | ) |
|
| (199,619 | ) |
|
| (142,533 | ) | ||||||||||||||
Non-controlling interest (1) |
|
|
|
| 200 |
|
|
| (6,698 | ) |
|
| (165 | ) | ||||||||||||||
|
|
|
|
| (230,182 | ) |
|
| (206,317 | ) |
|
| (142,698 | ) | ||||||||||||||
Net loss attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundial Growers Inc. |
|
|
|
| (271,464 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) | ||||||||||||||
Non-controlling interest |
| 5(c) |
|
| (165 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Sundial Growers Inc. (1) |
|
|
|
| (230,382 | ) |
|
| (233,246 | ) |
|
| (271,464 | ) | ||||||||||||||
Non-controlling interest (1) |
| 17(b) |
|
| 200 |
|
|
| (6,698 | ) |
|
| (165 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (230,182 | ) |
|
| (239,944 | ) |
|
| (271,629 | ) |
Comprehensive loss attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundial Growers Inc. |
|
|
|
| (264,598 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) | ||||||||||||||
Non-controlling interest |
| 5(c) |
|
| (165 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Sundial Growers Inc. (1) |
|
|
|
| (222,775 | ) |
|
| (232,646 | ) |
|
| (264,598 | ) | ||||||||||||||
Non-controlling interest (1) |
|
|
|
| 200 |
|
|
| (6,698 | ) |
|
| (165 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (222,575 | ) |
|
| (239,344 | ) |
|
| (264,763 | ) |
Net loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net loss per common share attributable to Sundial Growers Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Basic and diluted |
| 25 |
| $ | (3.17 | ) |
| $ | (0.82 | ) |
| $ | (0.23 | ) |
| 31 |
| $ | (0.12 | ) |
| $ | (1.07 | ) |
| $ | (3.17 | ) |
Segment information (note 6)
(1) | Recast – refer to note 17(b). |
See accompanying notes to the consolidated financial statements.
F-3
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
| Note | Share capital |
| Warrants |
| Contributed surplus |
| Convertible notes – equity component |
| Contingent consideration |
| Accumulated deficit |
| Accumulated other comprehensive loss |
| Non- controlling interest |
| Total equity |
| Note | Share capital |
| Warrants |
| Contributed surplus |
| Convertible notes – equity component |
| Contingent consideration |
| Accumulated deficit (1) |
| Accumulated other comprehensive income |
| Non- controlling interest (1) |
| Total equity |
| ||||||||||||||||||
Balance at February 28, 2017 |
|
| 15,136 |
| — |
| — |
| — |
| — |
| (3,615 | ) |
| — |
| — |
| 11,521 |
| |||||||||||||||||||||||||||||||||||
Net loss |
|
| — |
| — |
| — |
| — |
| — |
| (12,995 | ) |
| — |
| — |
| (12,995 | ) | |||||||||||||||||||||||||||||||||||
Share issuances |
|
| 8,123 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 8,123 |
| ||||||||||||||||||||||||||||||||||||
Shares issued to related parties |
|
| 3,000 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3,000 |
| ||||||||||||||||||||||||||||||||||||
Share issuance costs |
|
| (515 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (515 | ) | |||||||||||||||||||||||||||||||||||
Share-based compensation |
|
| 25 |
| — |
| 4,551 |
| — |
| — |
| — |
| — |
| — |
| 4,576 |
| ||||||||||||||||||||||||||||||||||||
Balance at February 28, 2018 |
|
| 25,769 |
| — |
| 4,551 |
| — |
| — |
| (16,610 | ) |
| — |
| — |
| 13,710 |
| |||||||||||||||||||||||||||||||||||
Net loss |
|
| — |
| — |
| — |
| — |
| — |
| (56,526 | ) |
| — |
| — |
| (56,526 | ) | |||||||||||||||||||||||||||||||||||
Share issuances |
|
| 20,452 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 20,452 |
| ||||||||||||||||||||||||||||||||||||
Shares issued to related parties |
|
| 16,474 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 16,474 |
| ||||||||||||||||||||||||||||||||||||
Share issuance costs |
|
| (310 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (310 | ) | |||||||||||||||||||||||||||||||||||
Share repurchase |
|
| (827 | ) |
| — |
| — |
| — |
| — |
| (15,738 | ) |
| — |
| — |
| (16,565 | ) | ||||||||||||||||||||||||||||||||||
Fair value allocated to warrants |
|
| (3,108 | ) |
| 3,108 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||
Warrants exercised |
|
| 2,182 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,182 |
| ||||||||||||||||||||||||||||||||||||
Share-based compensation |
|
| 521 |
| — |
| 6,889 |
| — |
| — |
| — |
| — |
| — |
| 7,410 |
| ||||||||||||||||||||||||||||||||||||
Employee warrants exercised |
|
| 3,980 |
| — |
| (1,947 | ) |
| — |
| — |
| — |
| — |
| — |
| 2,033 |
| |||||||||||||||||||||||||||||||||||
Equity component of convertible notes |
|
| — |
| — |
| — |
| 3,232 |
| — |
| — |
| — |
| — |
| 3,232 |
| ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 |
|
| 65,133 |
| 3,108 |
| 9,493 |
| 3,232 |
| — |
| (88,874 | ) |
| — |
| — |
| (7,908 | ) |
|
| 65,133 |
| 3,108 |
| 9,493 |
| 3,232 |
| — |
| (88,874 | ) |
| — |
| — |
| (7,908 | ) | ||||||||||||||
Net loss |
|
| — |
| — |
| — |
| — |
| — |
| (271,464 | ) |
| — |
| (165 | ) |
| (271,629 | ) |
|
| — |
| — |
| — |
| — |
| — |
| (271,464 | ) |
| — |
| (165 | ) |
| (271,629 | ) | ||||||||||||
Other comprehensive income |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 6,866 |
| — |
| 6,866 |
|
|
| — |
| — |
| — |
| — |
| — |
| — |
| 6,866 |
| — |
| 6,866 |
| ||||||||||||||||
Share issuances | 19(b) |
| 198,378 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 198,378 |
|
|
| 198,378 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 198,378 |
| ||||||||||||||||
Shares issued to related parties | 17,19(b) |
| 63,460 |
| 5,833 |
| — |
| — |
| — |
| — |
| — |
| — |
| 69,293 |
|
|
| 63,460 |
| 5,833 |
| — |
| — |
| — |
| — |
| — |
| — |
| 69,293 |
| ||||||||||||||||
Share issuance costs | 19(b) |
| (12,770 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (12,770 | ) |
|
| (12,770 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (12,770 | ) | ||||||||||||||
Business acquisitions | 5 |
| 39,849 |
| — |
| — |
| — |
| 2,279 |
| — |
| — |
| 4,879 |
| 47,007 |
|
|
| 39,849 |
| — |
| — |
| — |
| 2,279 |
| — |
| — |
| 4,879 |
| 47,007 |
| ||||||||||||||||
Convertible debt - conversions | 14,15 |
| 113,526 |
| 6,731 |
| — |
| (3,232 | ) |
| — |
| — |
| — |
| — |
| 117,025 |
|
|
| 113,526 |
| 6,731 |
| — |
| (3,232 | ) |
| — |
| — |
| — |
| — |
| 117,025 |
| ||||||||||||||
Warrants reclassified from liability | 19(c) |
| — |
| 16,091 |
| — |
| — |
| — |
| — |
| — |
| — |
| 16,091 |
|
|
| — |
| 16,091 |
| — |
| — |
| — |
| — |
| — |
| — |
| 16,091 |
| ||||||||||||||||
Warrants exercised | 19(c) |
| 21,882 |
| (3,932 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| 17,950 |
|
|
| 21,882 |
| (3,932 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| 17,950 |
| ||||||||||||||
Share-based compensation | 20 |
| 2,515 |
| — |
| 37,009 |
| — |
| — |
| — |
| — |
| — |
| 39,524 |
|
|
| 2,515 |
| — |
| 37,009 |
| — |
| — |
| — |
| — |
| — |
| 39,524 |
| ||||||||||||||||
Employee warrants exercised | 20 |
| 17,681 |
| — |
| (16,310 | ) |
| — |
| — |
| — |
| — |
| — |
| 1,371 |
|
|
| 17,681 |
| — |
| (16,310 | ) |
| — |
| — |
| — |
| — |
| — |
| 1,371 |
| ||||||||||||||
Balance at December 31, 2019 |
|
| 509,654 |
| 27,831 |
| 30,192 |
| — |
| 2,279 |
| (360,338 | ) |
| 6,866 |
| 4,714 |
| 221,198 |
|
|
| 509,654 |
| 27,831 |
| 30,192 |
| — |
| 2,279 |
| (360,338 | ) |
| 6,866 |
| 4,714 |
| 221,198 |
| ||||||||||||||
Net loss (1) |
|
| — |
| — |
| — |
| — |
| — |
| (233,246 | ) |
| — |
| (6,698 | ) |
| (239,944 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 600 |
| — |
| 600 |
| ||||||||||||||||||||||||||||||||||||
Share issuances | 23(b) |
| 176,931 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 176,931 |
| ||||||||||||||||||||||||||||||||||||
Share issuance costs | 23(b) |
| (5,593 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (5,593 | ) | |||||||||||||||||||||||||||||||||||
Convertible debt - conversions |
|
| 63,002 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 63,002 |
| ||||||||||||||||||||||||||||||||||||
Derivative warrants exercised | 19 |
| 55,912 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 55,912 |
| ||||||||||||||||||||||||||||||||||||
Warrants issued | 23(c) |
| — |
| 306 |
| — |
| — |
| — |
| — |
| — |
| — |
| 306 |
| ||||||||||||||||||||||||||||||||||||
Warrants expired | 23(c) |
| — |
| (21,999 | ) |
| 21,999 |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||
Dispositions | 6 |
| (38,447 | ) |
| — |
| — |
| — |
| — |
| 35,456 |
| (7,466 | ) |
| — |
| (10,457 | ) | ||||||||||||||||||||||||||||||||||
Share-based compensation |
|
| 52 |
| — |
| 7,688 |
| — |
| — |
| — |
| — |
| — |
| 7,740 |
| ||||||||||||||||||||||||||||||||||||
Employee awards exercised |
|
| 535 |
| — |
| (535 | ) |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 |
|
| 762,046 |
| 6,138 |
| 59,344 |
| — |
| 2,279 |
| (558,128 | ) |
| — |
| (1,984 | ) |
| 269,695 |
| ||||||||||||||||||||||||||||||||||
Net (loss) earnings |
|
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (230,382 | ) |
| 0 |
| 200 |
| (230,182 | ) | |||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 7,607 |
| 0 |
| 7,607 |
| ||||||||||||||||||||||||||||||||||||
Loss of control of subsidiary | 17(b) |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 2,013 |
| 2,013 |
| ||||||||||||||||||||||||||||||||||||
Share issuances | 23(b) |
| 977,425 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 977,425 |
| ||||||||||||||||||||||||||||||||||||
Share issuance costs | 23(b) |
| (16,371 | ) |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (16,371 | ) | |||||||||||||||||||||||||||||||||||
Derivative warrants exercised | 19 |
| 277,136 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 277,136 |
| ||||||||||||||||||||||||||||||||||||
Acquisition | 5 |
| 26,216 |
| 1,771 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 27,987 |
| ||||||||||||||||||||||||||||||||||||
Convertible debenture settlement | 5 |
| 2,671 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 2,671 |
| ||||||||||||||||||||||||||||||||||||
Warrants issued | 23(c) |
| 0 |
| 361 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 361 |
| ||||||||||||||||||||||||||||||||||||
Warrants exercised | 23(c) |
| 178 |
| (178 | ) |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| |||||||||||||||||||||||||||||||||||
Share-based compensation | 24 |
| 8 |
| 0 |
| 12,715 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 12,723 |
| ||||||||||||||||||||||||||||||||||||
Employee awards exercised |
|
| 6,395 |
| 0 |
| (6,194 | ) |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 201 |
| |||||||||||||||||||||||||||||||||||
Modification of equity-settled plan | 24(d) |
| 0 |
| 0 |
| (5,131 | ) |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| (5,131 | ) | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 |
|
| 2,035,704 |
| 8,092 |
| 60,734 |
| 0 |
| 2,279 |
| (788,510 | ) |
| 7,607 |
| 229 |
| 1,326,135 |
|
(1) | Recast – refer to note 17(b). |
See accompanying notes to the consolidated financial statements.
F-4
Consolidated StatementStatements of Cash Flows
(Expressed in thousands of Canadian dollars)
|
|
|
| Year ended December 31 |
|
| Ten months ended December 31 |
|
| Year ended February 28 |
|
|
|
| Year ended December 31 |
| ||||||||||||
|
| Note |
| 2019 |
|
| 2018 |
|
| 2018 |
|
| Note |
| 2021 |
|
| 2020 |
|
| 2019 |
| ||||||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
|
| (271,629 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) | ||||||||||||||
Net loss from continuing operations for the period |
|
|
|
| (230,182 | ) |
|
| (206,317 | ) |
|
| (142,698 | ) | ||||||||||||||
Items not involving cash: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax recovery |
|
|
|
| (4,626 | ) |
|
| — |
|
|
| — |
|
| 22 |
|
| (2,271 | ) |
|
| 0 |
|
|
| (3,609 | ) |
Change in fair value of biological assets |
|
|
|
| (30,726 | ) |
|
| 1,280 |
|
|
| (366 | ) |
| 11 |
|
| (4,708 | ) |
|
| (5,432 | ) |
|
| (30,340 | ) |
Share-based compensation |
| 20 |
|
| 39,524 |
|
|
| 7,410 |
|
|
| 4,576 |
|
| 24 |
|
| 12,307 |
|
|
| 8,566 |
|
|
| 38,698 |
|
Depreciation and amortization |
| 10,11 |
|
| 9,778 |
|
|
| 920 |
|
|
| 411 |
|
| 13,15 |
|
| 9,603 |
|
|
| 11,582 |
|
|
| 6,296 |
|
Loss (gain) on disposition of PP&E |
|
|
|
| (21 | ) |
|
| 17 |
|
|
| 35 |
| ||||||||||||||
(Gain) loss on disposition of PP&E |
|
|
|
| (235 | ) |
|
| (488 | ) |
|
| (8 | ) | ||||||||||||||
Inventory obsolescence |
| 12 |
|
| 16,978 |
|
|
| 45,913 |
|
|
| 0 |
| ||||||||||||||
Transaction costs |
|
|
|
| 1,279 |
|
|
| — |
|
|
| — |
|
|
|
|
| 0 |
|
|
| 0 |
|
|
| 1,279 |
|
Finance costs |
| 23 |
|
| 12,941 |
|
|
| 917 |
|
|
| — |
|
| 29 |
|
| 3,716 |
|
|
| (3,734 | ) |
|
| 11,070 |
|
Gain on investment |
|
|
|
| (165 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Change in estimate of fair value of derivative warrants |
| 19 |
|
| 77,834 |
|
|
| 12,995 |
|
|
| 0 |
| ||||||||||||||
Loss on cancellation of contracts |
|
|
|
| 2,870 |
|
|
| 671 |
|
|
| 0 |
| ||||||||||||||
Loss on financial obligation |
|
|
|
| 60,308 |
|
|
| 18,485 |
|
|
| — |
|
|
|
|
| 0 |
|
|
| 0 |
|
|
| 60,308 |
|
Change in fair value of contingent consideration |
| 5(a) |
|
| 18,645 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Unrealized foreign exchange (gain) loss |
|
|
|
| (1,108 | ) |
|
| — |
|
|
| — |
|
|
|
|
| (63 | ) |
|
| (757 | ) |
|
| 671 |
|
Restructuring costs |
|
|
|
| 0 |
|
|
| 448 |
|
|
| 0 |
| ||||||||||||||
Warrants issued for services |
| 23(c) |
|
| 0 |
|
|
| 306 |
|
|
| 0 |
| ||||||||||||||
Asset impairment |
|
|
|
| 162 |
|
|
| 523 |
|
|
| 2,184 |
|
| 13 |
|
| 60,000 |
|
|
| 79,191 |
|
|
| 162 |
|
Goodwill impairment |
|
|
|
| 100,305 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Share of profit of equity-accounted investees |
| 17(a) |
|
| (32,913 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Other expenses |
| 17(b) |
|
| 1,864 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Gain on disposition of marketable securities |
| 9,26 |
|
| (20,213 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Unrealized loss on marketable securities |
| 9,26 |
|
| 64,714 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Additions to marketable securities |
| 9 |
|
| (158,101 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Proceeds from disposal of marketable securities |
| 9 |
|
| 29,876 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Income distributions from equity-accounted investees |
| 17(a) |
|
| 15,021 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Change in non-cash working capital |
| 24 |
|
| (47,403 | ) |
|
| 1,217 |
|
|
| 910 |
|
| 30 |
|
| (1,534 | ) |
|
| (5,259 | ) |
|
| (41,626 | ) |
Net cash used in operating activities from continuing operations |
|
|
|
| (155,437 | ) |
|
| (62,315 | ) |
|
| (99,797 | ) | ||||||||||||||
Net cash provided by operating activities from discontinued operations |
| 6 |
|
| 0 |
|
|
| 4,820 |
|
|
| (12,939 | ) | ||||||||||||||
Net cash used in operating activities |
|
|
|
| (112,736 | ) |
|
| (25,757 | ) |
|
| (5,245 | ) |
|
|
|
| (155,437 | ) |
|
| (57,495 | ) |
|
| (112,736 | ) |
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
| 10 |
|
| (138,135 | ) |
|
| (76,321 | ) |
|
| (7,588 | ) |
| 13 |
|
| (3,793 | ) |
|
| (3,024 | ) |
|
| (110,271 | ) |
Additions to intangible assets |
| 15 |
|
| 0 |
|
|
| (150 | ) |
|
| 0 |
| ||||||||||||||
Additions to investments |
|
|
|
| (24,206 | ) |
|
| (51,876 | ) |
|
| 0 |
| ||||||||||||||
Additions to equity-accounted investees |
| 17(a) |
|
| (395,569 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Capital distributions from equity-accounted investees |
| 17(a) |
|
| 10,481 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Proceeds from disposal of PP&E |
|
|
|
| 83 |
|
|
| — |
|
|
| 30 |
|
| 13 |
|
| 194 |
|
|
| 2,109 |
|
|
| 51 |
|
Acquisition of Bridge Farm |
| 5(a) |
|
| (77,023 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Other acquisitions, net of cash acquired |
|
|
|
| 854 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Acquisition |
| 5 |
|
| (82,775 | ) |
|
| 0 |
|
|
| (77,023 | ) | ||||||||||||||
Change in non-cash working capital |
| 24 |
|
| 1,077 |
|
|
| 10,282 |
|
|
| (2,121 | ) |
| 30 |
|
| (612 | ) |
|
| (11,319 | ) |
|
| 1,659 |
|
Net cash used in investing activities from continuing operations |
|
|
|
| (496,280 | ) |
|
| (64,260 | ) |
|
| (185,584 | ) | ||||||||||||||
Net cash used in investing activities from discontinued operations |
| 6 |
|
| 0 |
|
|
| (6,617 | ) |
|
| (27,560 | ) | ||||||||||||||
Net cash used in investing activities |
|
|
|
| (213,144 | ) |
|
| (66,039 | ) |
|
| (9,679 | ) |
|
|
|
| (496,280 | ) |
|
| (70,877 | ) |
|
| (213,144 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Syndicated Credit Agreement, net of costs |
| 13(a) |
|
| 82,687 |
|
|
| — |
|
|
| — |
| ||||||||||||||
(Repayment) proceeds of Credit Facilities |
| 13(b) |
|
| (32,871 | ) |
|
| 32,159 |
|
|
| — |
| ||||||||||||||
Proceeds from Term Debt Facility, net of costs |
| 13(c) |
|
| 105,539 |
|
|
| — |
|
|
| — |
| ||||||||||||||
(Repayment) proceeds of other debt instruments |
| 13(d)-(g) |
|
| (56,173 | ) |
|
| 8,546 |
|
|
| 7,000 |
| ||||||||||||||
Proceeds from convertible notes, net of costs |
| 14 |
|
| 90,373 |
|
|
| 27,764 |
|
|
| — |
|
|
|
|
| 0 |
|
|
| 18,070 |
|
|
| 90,373 |
|
Payments on lease obligations |
|
|
|
| (791 | ) |
|
| (34 | ) |
|
| (109 | ) | ||||||||||||||
Proceeds from issuance of shares, net of costs |
| 19(b) |
|
| 177,202 |
|
|
| 36,616 |
|
|
| 9,569 |
| ||||||||||||||
Proceeds from exercise of warrants |
| 19(c) |
|
| 17,950 |
|
|
| 2,182 |
|
|
| — |
| ||||||||||||||
Change in restricted cash |
| 8 |
|
| (21,680 | ) |
|
| 10,494 |
|
|
| (15,477 | ) | ||||||||||||||
(Repayment) proceeds of long-term debt |
|
|
|
| 0 |
|
|
| (84,493 | ) |
|
| 99,182 |
| ||||||||||||||
Payments on lease obligations, net |
|
|
|
| (1,008 | ) |
|
| (420 | ) |
|
| (292 | ) | ||||||||||||||
Proceeds from issuance of shares and registered offerings, net of costs |
| 23(b) |
|
| 1,062,310 |
|
|
| 181,841 |
|
|
| 177,202 |
| ||||||||||||||
Proceeds from exercise of derivative warrants |
| 19 |
|
| 119,318 |
|
|
| 20,391 |
|
|
| 0 |
| ||||||||||||||
Proceeds from exercise of equity classified warrants |
|
|
|
| 0 |
|
|
| 0 |
|
|
| 17,950 |
| ||||||||||||||
Proceeds from exercise of employee warrants |
| 20 |
|
| 1,371 |
|
|
| 2,033 |
|
|
| — |
|
| 24 |
|
| 201 |
|
|
| 0 |
|
|
| 1,371 |
|
Exercise of cash-settled DSUs |
| 24 |
|
| (315 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Convertible debenture settlement |
| 5 |
|
| (9,354 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Payment on exercise of contingent consideration warrants |
| 5,23(c) |
|
| (219 | ) |
|
| 0 |
|
|
| 0 |
| ||||||||||||||
Settlement of convertible notes |
| 15 |
|
| (4,190 | ) |
|
| — |
|
|
| — |
|
|
|
|
| 0 |
|
|
| 0 |
|
|
| (4,190 | ) |
Settlement of financial obligation |
| 17 |
|
| (9,500 | ) |
|
| — |
|
|
| — |
|
|
|
|
| 0 |
|
|
| 0 |
|
|
| (9,500 | ) |
Restricted cash |
| 13(a) |
|
| (15,477 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Repurchase of shares |
|
|
|
| — |
|
|
| (9,634 | ) |
|
| — |
| ||||||||||||||
Change in non-cash working capital |
| 24 |
|
| 2,147 |
|
|
| (1,393 | ) |
|
| 2,426 |
|
| 30 |
|
| 348 |
|
|
| (2,498 | ) |
|
| 2,147 |
|
Net cash provided by financing activities from continuing operations |
|
|
|
| 1,149,601 |
|
|
| 143,385 |
|
|
| 358,766 |
| ||||||||||||||
Net cash used in financing activities from discontinued operations |
| 6 |
|
| 0 |
|
|
| (639 | ) |
|
| (499 | ) | ||||||||||||||
Net cash provided by financing activities |
|
|
|
| 358,267 |
|
|
| 98,239 |
|
|
| 18,886 |
|
|
|
|
| 1,149,601 |
|
|
| 142,746 |
|
|
| 358,267 |
|
Impact of foreign currency translation |
|
|
|
| (1,171 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Effect of exchange rate changes on cash held in foreign currency |
|
|
|
| (9 | ) |
|
| 665 |
|
|
| (1,171 | ) | ||||||||||||||
Change in cash and cash equivalents |
|
|
|
| 31,216 |
|
|
| 6,443 |
|
|
| 3,962 |
|
|
|
|
| 497,875 |
|
|
| 15,039 |
|
|
| 31,216 |
|
Cash and cash equivalents, beginning of year |
|
|
|
| 14,121 |
|
|
| 7,678 |
|
|
| 3,716 |
| ||||||||||||||
Cash and cash equivalents, beginning of period |
|
|
|
| 60,376 |
|
|
| 45,337 |
|
|
| 14,121 |
| ||||||||||||||
Cash and cash equivalents, end of period |
|
|
|
| 45,337 |
|
|
| 14,121 |
|
|
| 7,678 |
|
|
|
|
| 558,251 |
|
|
| 60,376 |
|
|
| 45,337 |
|
See accompanying notes to the consolidated financial statements.
F-5
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Sundial Growers Inc. (“Sundial” or the “Company”) was incorporated under the Business Corporations Act (Alberta) on August 19, 2006.
The Company’s head office is located at 200,300, 919 11th Avenue SW, Calgary, Alberta, Canada.
The principal activities of the Company are the production, distribution and sale of cannabis in Canada pursuant to the Cannabis Act (Canada) (the “Cannabis Act”), the operation and support of corporate-owned and franchise retail cannabis stores in Canadian jurisdictions where the private sale of recreational cannabis is permitted and the production, distribution and saledeployment of ornamental flowers and herbs in the United Kingdom.capital to investment opportunities. The production, distribution and sale of cannabis was regulated by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) in Canada, up to and including October 16, 2018. On October 17, 2018, the ACMPR was superseded by the Cannabis Act which regulates the production, distribution, and possession of cannabis for both medical and adult recreational access in Canada.
Sundial and its subsidiaries currently operate solely in Canada. Through its joint venture SunStream Bancorp Inc. (note 17(a)), the Company also provides growth capital that pursues indirect investment and financial services opportunities in the global cannabis sector, as well as other investment opportunities. The Company is planning to expand its operations to jurisdictions outside of Canada where federally lawfulalso makes strategic portfolio investments in debt and regulated, including subsidiaries which operate in Europe and the United Kingdom.equity securities.
On August 1, 2019, theThe Company’s common shares began tradingtrade on the Nasdaq Global SelectCapital Market (“Nasdaq”) under the ticker symbol “SNDL”.
Sundial does not engage in any U.S. cannabis-related activitiesCOVID-19
The global impact of COVID-19 has contributed to uncertainty as defined in Canadian Securities Administrators Staff Notice 51-352.
Going concern assumption
These consolidated financial statements have been prepared on a going concern basis, which assumes thatto the Company will be able to realize its assets and discharge its liabilities inhealth of the normal course of business. The Company is an early-stage company, has accumulated significant losses and is in non-compliance with its loan covenants (note 13a) as at December 31, 2019. Furthermore, the Company and certain of its subsidiaries have a limited operating history and a history of negative cash flow from operating activities.
global economy. The Company has a Producer’s Licenseimplemented several pandemic-related procedures and protocols at eachits facilities, including enhanced screening measures, enhanced cleaning and sanitation processes with increased frequency, encouraging social distancing measures and directing employees to work from home if possible. At the retail store level, the Company has implemented enhanced in-store procedures including increased frequency of its two facilities, a license to sell live plants to other licensed producerscleaning, installing safety shields and its standard processing and sales license from Health Canada.reducing paper materials. The Company has maintained compliance with all Health Canada’s requirements under these licenses.
The ability of the Companyalso adapted its business model by moving toward online sales platforms that enable customers to continue as a going concern depends on Health Canada maintaining such licenses, the continued support of its lenders, its ability to achieve profitable operationsorder products online for fast pickup and its ability to raise additional financing to fund current and future operating and investing activities. There is no assurance that the Company will be able to accomplish any of the foregoing objectives.
During the year ended December 31, 2019, the Company sourced the capital and liquidity to advance its strategic growth initiatives by way of the capital transactions describedpayment in notes 13, 14 and 19. At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the full principal amount of the Term Debt Facility were classified as current liabilities on the Company’s statement of financial position. Additionally, based on the Company’s most recent financial projections, management is forecasting that the Company will be in violation of the Syndicated Credit Agreement debt covenants as at March 31, 2020, June 30, 2020 and September 30, 2020.
store. The Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breachbelieves that it can maintain safe operations with these pandemic-related procedures and a waiver for any corresponding breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with the each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.
In addition, the Company continues to have discussions with its lenders to provide certain amendments to the restrictive covenants and to defer principal payments for the remainder of 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will beprotocols in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future. Any failure or delay in completing these amendments would have a significant negative impact on the Company’s liquidity and further impact the Company’s ability to operate as a going concern. In such a case, the Company would look to alternative sources of financing, delay capital
F-6
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
expenditures and/or evaluate potential asset sales, and potentially could be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws.
In addition, the Company will require additional financing in the near term. The Company has engaged financial advisors and is in negotiations with potential capital providers including sources of debt and/or equity. These negotiations have been negatively impacted by the effects that the Covid-19 pandemic is having, and is expected to continue to have, on the overall business environment and financial markets generally. The Company continues to advance these initiatives, however, there is no certainty as to their ultimate completion or the timing thereof.
These conditions, combined with the accumulated losses to date, indicate the existence of a material uncertainty that casts substantial doubt on the Company’s ability to continue as a going concern. These consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern.
After giving consideration to current initiatives, the use of the going concern assumption is considered appropriate and the Company’s consolidated financial statements have been prepared on a going concern basis.place.
2. | Basis of presentation |
| a) | Statement of compliance |
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”) in effect as of December 31, 2019, except as described in note 3.
During 2018, the Company changed its fiscal year end from February 28 to December 31 and accordingly a ten-month period ended December 31, 2018 is presented in these consolidated financial statements. The change in fiscal year was made to better align the Company’s reporting calendar with other publicly listed companies.
These consolidated financial statements have been prepared on a going concern basis (note 1), based on Management’s assessment that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. These consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern.
Certain prior period amounts have been reclassified to conform to current year presentation. Specifically, the loss on financial obligation was included in finance costs in the prior year but has been disclosed as its own line item on the statement of comprehensive loss.2021.
These consolidated financial statements were approved and authorized for issue by the Boardboard of Directors (“Board”directors of Sundial (the “Board”) on March 30, 2020.April 27, 2022.
| b) | Basis of measurement |
These consolidated financial statements have been prepared on a historical cost basis, except for biological assets, and related inventorydeferred share units (“DSUs”) and certain financial instruments (note 32(a)) which are measured at fair value with changes in fair value recorded in earnings.
| c) | Functional and presentation currency |
These consolidated financial statements are presented in Canadian dollars, which is the functional and presentation currency of the Company and its Canadian basedCanadian-based subsidiaries. Subsidiaries incorporated inSundial Deutschland GmbH uses the jurisdiction of England and Wales use the Great Britain PoundEuropean Euro as its functional currency. Sundial Deutschland GmbH and Sundial Portugal, Unipessoal LDA useThe Company’s equity-accounted joint venture uses the European EuroUnited States dollar as theirits functional currency. Transactions in currencies other than the functional currency are translated at the rate prevailing at the date of transaction. Monetary assets and liabilities that are denominated in foreign currencies are translated at the rate prevailing at each reporting date. Income and expense amounts are translated at the dates of the transactions.
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
In preparing the Company’s consolidated financial statements, the financial statements of foreign subsidiaries are translated into Canadian dollars, the functional currency of the Company. The assets and liabilities of foreign subsidiaries that do not have a functional currency of Canadian dollars, are translated into Canadian dollars using exchange rates at the reporting date. Revenues and expenses of foreign operations are translated into Canadian dollars using foreign exchange rates that approximate those on the date of the underlying transactions. Foreign
F-7
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
exchange differences from the translation of foreign subsidiaries into Canadian dollars are recognized in Other Comprehensive Income.other comprehensive income (“OCI”).
In preparing the Company’s consolidated financial statements, the financial statements of the foreign equity-accounted joint venture are translated into Canadian dollars, the functional currency of the Company. The assets and liabilities of the foreign equity-accounted joint venture are translated into Canadian dollars using exchange rates at the reporting date. Revenues and expenses of the foreign equity-accounted joint venture are translated into Canadian dollars using foreign exchange rates that approximate those on the date of the underlying transactions. Foreign exchange differences from the translation of the foreign equity-accounted joint venture into Canadian dollars are recognized in OCI. The Company’s consolidated financial statements include its share of the Canadian dollar profit or loss and OCI of the equity-accounted joint venture.
| d) | Basis of consolidation |
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in these consolidated financial statements from the date that control commences until the date that control ceases.
Subsidiaries | Principal activity | Jurisdiction of incorporation | Equity ownership |
| Non-controlling interest ("NCI") |
| ||
KamCan Products Inc. | Inactive | British Columbia, Canada |
| 100 | % |
| 0 | % |
Sundial Deutschland GmbH | Inactive | Germany |
| 100 | % |
| 0 | % |
2657408 Ontario Inc. | Operations | Ontario, Canada |
| 100 | % |
| 0 | % |
NGBA-BC Holdings Ltd. | Operations | British Columbia, Canada |
| 100 | % |
| 0 | % |
Sundial Insurance (Bermuda) Ltd. | Operations | Bermuda |
| 100 | % |
| 0 | % |
Inner Spirit Holdings Ltd. | Operations | Alberta, Canada |
| 100 | % |
| 0 | % |
Spirit Leaf Inc. | Operations | Alberta, Canada |
| 100 | % |
| 0 | % |
Spirit Leaf Corporate Inc. | Operations | Alberta, Canada |
| 100 | % |
| 0 | % |
Spirit Leaf Ontario Inc. (1) | Operations | Ontario, Canada |
| 0 | % |
| 100 | % |
|
|
| ||
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
3. | Significant accounting policies |
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
Cash and cash equivalentsCASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, deposits held with banks and other short-term liquid investments with maturities of less than 90 days.
Restricted cash and cash equivalentsRESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash is recorded as current assets representing (i) a cash balance to satisfy margin requirements on the Company’s option trading position, and (ii) minimum balance required in accordance with the Syndicated Credit Agreementfunding requirements for interest coverage and funds held in trust by the Town of Olds, Alberta in accordance with municipal regulations relatedtwo separate captive insurance structures.
F-7
Sundial Growers Inc.
Notes to the grantingConsolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of a building permit.Canadian dollars, except where otherwise noted)
Biological assets
BIOLOGICAL ASSETS
The Company’s biological assets consist of cannabis plants and ornamental flowers.plants. The Company capitalizes all direct and indirect costs related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest, including labour related costs, grow consumables, materials, utilities, facilities costs, depreciation and quality and testing costs. Biological assets are then recorded at fair value and consist of cannabis plants in various stages of vegetation, including cannabis clones which have not been harvested. Net unrealized changes in fair value of biological assets less costcosts to sell during the period are included in the results of operations for the related period. Biological assets are valued in accordance with IAS 41 and are presented at their fair values less costs to sell up to the point of harvest. The fair values are determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts the amount for the expected selling price less costs to produce and sell per gram. The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. OurThe Company’s method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest. The estimated expected harvest yield is based on assumptions of the estimated yield per plant and the weighted average number of growing weeks completed as a percentage of total expected growing weeks as at year end. These estimates are subject to volatility in market prices,
F-8
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
market conditions, yields and several uncontrollable factors,costs, which could significantly affect the fair value of biological assets in future periods. Differences from the anticipated yield will be reflected in the net change in fair value of biological assets in future periods.
InventoryINVENTORY
Harvested cannabis
Inventories of harvested cannabis are valued at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value less costcosts to sell up to the point of harvest, which becomes the initial deemed cost. All subsequent direct and indirect post-harvest costs are capitalized to inventory as incurred, including labor related costs, consumables, materials, packaging supplies, utilities, facilities costs, as well as quality and testing costs. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Inventories for resale and cannabisCannabis supplies and consumables are initially valued at cost and subsequently at the lower of cost and net realizable value.
The valuation of biological assets at the point of harvest is used as the measurement basis for all cannabis-based inventory and, thus, any critical estimates and judgements related to the valuation of biological assets are also applicable to inventory. The valuation of work-in-progress and finished goods also requires the estimate of conversion costs incurred, which become part of the carrying amount of the inventory. We must also determine if
Retail inventory
Retail inventory is valued at Company-owned stores at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of any inventory exceedsbusiness, less estimated costs of selling the final product. Cost is determined by the weighted average method and comprises direct purchase costs. Inventory is written down to its net realizable value such as cases wherewhen the cost of inventory is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. The Company makes estimates related to obsolescence, future selling prices, have decreased, orseasonality, customer behavior and fluctuations in inventory has spoiled or has otherwise been damaged.levels.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment
Property, plant and equipment (“PP&E”) are carried at cost less accumulated depreciation, less any recognized impairment losses. The cost of additions, betterments, renewals, and interest during construction is capitalized. Each part of ana component of property, plant and equipmentPP&E with a cost that is significant in relation to the total cost of the component is depreciated separately. When the cost of replacing a portion of a component of property and equipmentPP&E is capitalized, the carrying amount of the replaced component is derecognized.
Depreciation of construction in progress assets commences when the assets are ready for their intended use or when a Health Canada producer’s licenselicence is granted. The assets’ residual values and useful lives are reviewed, and adjusted as
F-8
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
appropriate, at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by adjusting the depreciation period or method, as appropriate, and are treated as changes in accounting estimates.
Any gain or loss arising on the disposal or retirement of a component of property and equipmentPP&E is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the consolidated statements of loss and comprehensive loss.
Property, plant and equipmentPP&E are depreciated as they become available for use. Buildings are not depreciated until a producer’s licenselicence is obtained. For assets available for use, depreciation is computed using the straight-line method over the estimated useful lifelives of the assets, as described below:
|
| |
|
| |
|
| |
|
| |
|
|
IntangibleProduction facilities20 years
Equipment1 to 10 years
Right-of-use assetsShorter of estimated useful life or lease term
INTANGIBLE ASSETS
Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is provided on a straight-line basis over their estimated useful lives, once the intangible asset is available for use, as described below. If the intangible asset is not yet available for use it will be tested for impairment on an annual basis in accordance with IAS 38.
The Company’s intangible assets at December 31, 2021, are comprised of the following:
• | Intellectual property purchased from Sun 8 Holdings Inc. in 2019 consisting of world-wide proprietary rights to certain cannabis brands, including patents, copyrights and trademarks with a useful life of 15 years. |
• | Intellectual property purchased from a private company consisting of world-wide proprietary rights to certain cannabis strains with a useful life of 12 years. |
Joint arrangements
Joint arrangements represent activities where the Company has joint control established by a contractual agreement. Joint control requires unanimous consent for the relevant financial and operational decisions. A joint arrangement is either a joint operation, whereby the parties have rights to certain cannabis brands, including patents, copyrightsthe assets and trademarks withobligations for the liabilities, or a useful life of 15 years.
Intellectual property acquired throughjoint venture, whereby the acquisition of Pathway RX Inc. consisting of proprietaryparties have rights to certain technology, copyrightsthe net assets.
For a joint operation, the parties consolidate their proportionate share of the assets, liabilities, revenues, expenses and trademarkscash flows of the arrangement with items of a useful lifesimilar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases.
Joint ventures are accounted for using the equity method of 20 years.
Intellectual propertyaccounting and are initially recognized at cost, or fair value if acquired throughas part of a business combination. Joint ventures are adjusted thereafter for the acquisitionpost-acquisition change in the Company's share of Bridge Farm consistingthe equity accounted investment's net assets. The Company’s consolidated financial statements include its share of customer relationshipsthe equity accounted investment's profit or loss and brands with useful livesother comprehensive income, until the date that joint control ceases. When the Company’s share of 3losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to 20 years.nil, and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. Distributions from and contributions to investments in equity accounted investees are recognized when received or paid.
Interests in equity-accounted investees
The Company’s interest in equity-accounted investees comprise interests in an associate and a joint venture.
Associates are those entities in which the Company has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Company has joint control, whereby the Company has rights to the net assets of the arrangement, rather than rights to assets and obligations for its liabilities.
F-9
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
ImpairmentInterests in associates and joint ventures are accounted for using the equity method. They are initially recognized at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Company’s share of assetsthe profit or loss and OCI of equity-accounted investees, until the date on which significant influence or joint control ceases.
IMPAIRMENT OF ASSETS
Management assesses and continually monitors internal and external indicators of impairment relating to ourthe Company’s assets. The assessment of indicators of impairment takes into account various factors including the likelihood of obtaining future licenseslicences from Health Canada, the demand for cannabis for medical and adult-userecreational purposes, the price of cannabis, and changes in market discount rates.
|
|
We apply(i)Financial assets
The Company applies an expected credit loss, or ECL,“ECL”, model to all debt financial assets not held at fair value through profit and loss, or “FVTPL”, where credit losses that are expected to transpire in futures years are provided for, irrespective of whether a loss event has occurred or not as at the statement of financial position date. For trade receivables, we havethe Company has applied the simplified approach under IFRS 9 and have calculated ECLs based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions. ECL’s are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of the difference between the cash flows due in accordance with the contract and the cash flow we expectthe Company expects to receive. ECL’s are discounted at the effective interest rate of the financial asset. For financial assets measured at amortized cost, the Company has applied the general approach under IFRS 9 and have calculated ECLs based on lifetime expected credit losses, taking into consideration whether the credit risk of a financial asset has increased significantly since initial recognition. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Company considers quantitative and qualitative information and analysis, based on the Company’s historical experience and informed credit assessment, that includes forward-looking information.
(ii)Non-financial assets |
|
|
The carrying amounts of our property, plant and equipmentthe Company’s PP&E and intangible assets, including goodwill, are assessed for impairment indicators at each reporting period end to determine whether there is an indication that such assets have experienced impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s or group of assetsassets’ estimated fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable independent cash inflows (a cash generating unit, or CGU)“CGU”).
Where an impairment loss is subsequently determined to have reversed, the carrying amount of the asset (or CGU) is adjusted to the revised estimate of its recoverable amount but limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU) previously. A reversal of an impairment loss is recognized immediately in the statements of loss and comprehensive loss.
Financial instrumentsFINANCIAL INSTRUMENTS
The Company classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instruments:
Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
F-10
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Level 2 – quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. A financial asset or liability is measured initially at fair value plus, for an item not measured at FVTPL, transaction costs that are directly attributable to its acquisition or issuance.
(i)Financial assets |
|
|
At initial recognition, a financial asset is classified and measured at: amortized cost, FVTPL or Fair Value Through Other Comprehensive Income depending on the business model and contractual cash flows of the instrument.
Financial assets at amortized cost are subsequently measured at amortized cost using the effective interest rate method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss.
Financial assets at FVTPL are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognize in profit or loss.
Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. A substantial modification to the terms of an existing financial asset results in the derecognition of the financial asset and the recognition of a new financial asset at fair value. In the event that the modification to the terms of an existing financial asset do not result in a substantial difference in the contractual cash flows the gross carrying amount of the financial asset is recalculated and the difference resulting from the adjustment in the gross carrying amount is recognized in earningsprofit or loss.
F-10
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company’s cash and cash equivalents, restricted cash and accounts receivable are measured at amortized cost. The Company’s marketable securities are measured at FVTPL. The Company’s long-term investments are measured at amortized cost and FVTPL. The Company has no financial assets measured at FVTPL or Fair Value Through Other Comprehensive Income.
(ii)Financial liabilities |
|
|
Financial liabilities are initially measured at amortized cost or FVTPL. Accounts payable and accrued liabilities are initially recognized at the amount required to be paid less any required discount to reduce the payables to fair value. Long-term debt is recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.
Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense and foreign exchange gains and losses, are recognized in profit or loss.
Financial liabilities are derecognized when the liability is extinguished. A substantial modification of the terms of an existing financial liability is recorded as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the consideration paid is recognized in earningsprofit or loss. Where a financial liability is modified in a way that does not constitute an extinguishment, the modified cash flows are discounted at the liability’s original effective interest rate. Transaction costs paid to third parties in a modification are amortized over the remaining term of the modified debt.
The Company’s accounts payable and accrued liabilities and long-term debtfinancial guarantee liability are measured at amortized cost. The Company’s convertible notesderivative warrant liabilities were designated as FVTPL upon initial recognitionrecognition.
F-11
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Provisions
A provision is recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the notes contained multiple embedded derivatives.obligation, and the amount of the obligation can be reliably estimated. The Company’s contingentamount of a provision is the best estimate of the consideration at the end of the reporting period. Provisions measured using estimated cash flows required to settle the obligation are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
A provision for onerous contracts is designatedrecognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The Company has 0 onerous contracts during the years ended and as FVTPL.at December 31, 2021 and 2020.
Non-monetary transactionsNON-MONETARY TRANSACTIONS
All non-monetary transactions are measured at the fair value of the asset surrendered or the asset received, whichever is more reliable, unless the transaction lacks commercial substance, or the fair value cannot be reliably established. The lack of commercial substance requirement is met when the future cash flows are expected to change significantly as a result of the transaction. When the fair value of a non-monetary transaction cannot be reliably measured, it is recorded at the carrying amount (after reduction, when appropriate, for impairment) of the asset given up, adjusted by the fair value of any monetary consideration received or given. When the asset received or the consideration given consists of shares in an actively traded market, the value of those shares will be considered fair value.
Repurchase of common shares
The repurchase of common shares are recorded at the value of the consideration given. All common shares repurchased are cancelled. Any excess of the purchase price over the carrying amount will be charged to accumulated deficit as share repurchase premiums.
Compound financial instrumentsCOMPOUND FINANCIAL INSTRUMENTS
The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability which does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the compound financial instrument taken as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.
Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition.
Interest and losses and gains relating to the financial liability are recognized in the consolidated statements of loss and comprehensive loss. On conversion, the financial liability is reclassified to equity; no0 gain or loss is recognized on conversion.
Convertible notes are compound financial instruments which are accounted for separately by their components: a financial liability and an equity instrument. The financial liability, which represents the obligation to pay coupon interest on the convertible notes in the future, is initially measured at its fair value and subsequently measured at amortized cost. The residual amount is accounted for as an equity instrument at issuance.
The identification of the components of convertible notes is based on interpretations of the substance of the contractual arrangement and therefore requires judgement from management. The determination of the fair value of the liability is also based on various assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.
RevenueREVENUE
Under IFRS 15, to determine the amount and timing of revenue to be recognized, we followthe Company follows a five-step model:
1.Identifying the contract with a customer
F-11
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
2.Identifying the performance obligations
3.Determining the transaction price
4.Allocating the transaction price to the performance obligations
5.Recognizing revenue when/as performance obligations are satisfied
Cannabis revenue
Gross revenue from the direct sale of cannabis for a fixed price is recognized when we transferthe Company transfers control of the goods to the customer. The transfer of control is specific to each contract and can range from the point of delivery to a specified length of time for the customer to accept the goods. Gross revenue from the sale of ornamental flowers and herbs is recognized when we transfer control of the goods to the customer, which is at the point of delivery.
For contracts that permit the customer to return goods, revenue is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Therefore, the amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data and management’s expectation
F-12
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
of future returns. In these circumstances, a refund liability and a right to recover returned goods asset are recognized. The right to recover returned goods asset is measured at the former carrying amount of the inventory less any expected costs to recover goods. The refund liability is included in accounts payable and accrued liabilities and the right to recover returned goods is included in inventory. The Company reviews its estimate of expected returns at each reporting date and updates the amounts of the asset and liability accordingly.
Gross revenue earned in Canada includes excise taxes, which we paythe Company pays as principal, but excludes duties and taxes collected on behalf of third parties. Net revenue is gross revenue less excise taxes. Gross revenue is recognized to the extent that it is highly probable that a significant reversal will not occur. Therefore, gross revenue is stated net of expected price discounts, allowances for customer returns and certain promotional activities and similar items. Generally, payment of the transaction price is due within credit terms that are consistent with industry practices, with no element of financing.
ResearchRetail revenue
Retail revenue consists of sales through corporate stores and developmente-commerce operations. Revenue at corporate stores is recognized at the point of sale when the customer takes control of the goods or service and is measured at the amount of consideration to which the Company expects to be entitled to, net of estimated returns, and sales incentives. The Company considers its performance obligations to be satisfied at the point of sale. The Company’s goods and services are generally capable of being distinct and are accounted for as a separate performance obligation. Sales through e-commerce operations are recognized when the customer takes control of the goods or services upon delivery and is measured at the amount of consideration to which the Company expects to be entitled, net of estimated returns, and sales incentives.
It is the Company’s policy to sell merchandise with a limited right to return. Returns are only provided through exchanges or the issuance of a gift certificate.
The Company sells gift cards. The sale of a gift card creates a future performance obligation. When (or as) the performance obligation is satisfied, the Company recognizes revenue as the amount of the transaction price.
Franchise revenue
Franchise fees are recognized at a point in time when the Company satisfies its performance obligations which is determined to be when the franchise begins operations. Performance obligations include site selection, lease assistance and training. Initial franchise fees are allocated to the performance obligations based on the estimated standalone selling prices. Funds received in advance of a franchise starting operations are recorded as franchise fee deposits.
Ongoing royalty and advertisement fees, which are determined on a formula basis in accordance with the terms of the relevant franchise agreement, based on monthly revenues of the franchisees, are recognized as revenue when the contractual performance obligations have been achieved or other service-related performance obligations have been completed. The performance obligations relate to providing support to the franchise partners and being stewards of the Spiritleaf brand. While the franchisees are operating under the name Spiritleaf, they are utilizing the Spiritleaf trademark, thereby, the Company has performed its obligations to recognize the revenue, as per the franchise agreements.
Other revenue
Millwork revenue is defined as the proceeds and receivables related to the sale of millwork, which includes store fixtures. Millwork revenue is recognized at a point in time when a contractual exchange agreement has been entered into, and the performance obligation is considered to have been met when the millwork has been delivered to the franchise partner.
Supply revenue represents revenues earned from the sales of custom Spiritleaf accessories to franchise locations. The Spiritleaf accessory revenue is earned when the goods are shipped.
RESEARCH AND DEVELOPMENT
Research costs are expensed in the period incurred. Development costs are expensed in the period incurred unless the Company believes a development project meets the generally accepted criteria for deferral and amortization ofper IAS 38 “Intangible Assets”. Research and development costs comprise consulting fees and licenselicence acquisition fees. NoNaN development costs have been capitalized as at December 31, 20192021, or December 31, 2018.2020.
Share-basedF-13
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
SHARE-BASED COMPENSATION
The Company’s share-based compensation plans include equity-settled awards and cash-settled awards.
The fair value of share-based compensation expenses is estimated using the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant,award, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrantsawards granted. Share-based compensation expense includes the expense for the issue of simple
Equity-settled
Simple and performance warrants, stock options and restricted share units (“RSUs”) are granted to employees, directors, and others at the discretion of our boardthe Board. The grant date fair value of directors. Givensimple warrants, performance warrants, stock options and RSUs is recognized as share-based compensation expense, with a corresponding increase in contributed surplus, over the absencevesting period of an active trading marketthe awards. On exercise of simple warrants, performance warrants and stock options, the cash consideration received is credited to share capital and the associated amount in contributed surplus is reclassified to share capital. On exercise of RSUs, the associated amount in contributed surplus is reclassified to share capital.
Cash-settled
DSUs are granted to directors and represent a right for the Company’s common shares priorholder to its initial public offering, determiningreceive a cash payment equal to the fair value of the Company’s common shares required our boardcalculated at the date of directors to make complexsuch payment.
DSUs are accounted for as a liability instrument and subjective judgments. Our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determinemeasured at fair value based on the fairmarket value of the Company’s common shares at each period end. The fair value is recognized as ofshare-based compensation over the date of each grant. For periods prior to January 1, 2019,vesting period. Fluctuations in the fair value ofare recognized within share-based compensation expense was primarily estimated usingin the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee. Subsequent to January 1, 2019, the fair value of share-based compensation expenses was estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee, as well as, other factors, including: the Company’s stage of development; the impact of significant corporate events, operational changes or milestones; material risks related to the business; the Company’s financial condition and operating results, including its revenue, history of net losses and levels of available capital resources; equity market conditions affecting comparable public companies; general U.S. market conditions; the likelihood and potential timing of achieving a liquidity event or completing an offering of common shares, such as an initial public offering; and the instruments involved illiquid securities of a private company. Subsequent to the Company’s IPO on August 6, 2019, the fair value of the Company’s shares is based on public trading data. In determining the amount of share-based compensation expense, the Company utilized the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted.in which they occur.
Income taxesINCOME TAXES
Income taxes are recognized in the consolidated statements of loss and comprehensive loss, except to the extent that they relate to items recognized directly in equity, in which case the tax is recognized in equity.
Current taxes are generally the expected income tax payable on taxable income for the reporting period, calculated using rates enacted or substantively enacted at the consolidated statements of financial position dates, and includes any adjustment to income tax payable or recoverable in respect of previous periods.
F-12
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Uncertain income tax positions are accounted for using the standards applicable to current income tax assets and liabilities. Liabilities and assets are recorded to the extent they are deemed to be probable.
Deferred tax is recognized using the asset and liability method, based on temporary differences between financial statement carrying amounts of assets and liabilities, and their respective income tax bases. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the consolidated statements of financial position date and are expected to apply when the related deferred tax asset is realized, or the deferred tax liability is settled. Deferred tax is not accounted for where it arises from initial recognition of an asset or liability in a transaction other than a business combination which, at the time of the transaction, affects neither accounting nor taxable income (loss). The amount of deferred tax recognized is based on the expected manner and timing of realization or settlement of the carrying amount of assets and liabilities. Deferred tax assets are recognized only to the extent that it is probable that future taxable income will be available for which the temporary differences can be utilized. Deferred tax assets are reviewed at each consolidated statements of financial position date and adjusted to the extent that it is no longer probable that the related tax benefit will be realized.
Current taxTax assets and liabilities are offset when the Company has a legally enforceable right to offset the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Business combinationsDeferred tax assets, including those arising from tax loss carry-forwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be affected.
F-14
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
BUSINESS COMBINATIONS
Business combinations are accounted for using the acquisition method of accounting when the acquired assets meet the definition of a business. The acquired identifiable assets and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date. The cost of an acquisition is measured as the fair value of consideration transferred to the sellers, including cash paid and the fair value of assets given, equity instruments issued, and liabilities incurred orof the seller assumed at the acquisition date. Any excess of the costfair value of acquisitionthe consideration paid over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets acquired, the difference is recognized immediately in net income.earnings. Transactions costs associated with business combinations are expensed as incurred.
GoodwillFAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED IN A BUSINESS COMBINATION
The Company records goodwill relating tofair value of assets acquired and liabilities assumed in a business combination, whenincluding contingent consideration and goodwill, is estimated based on information available at the purchase price exceedsdate of acquisition. Various valuation techniques are applied for measuring fair value including market comparables and discounted cash flows which rely on assumptions such as future selling prices, expected sales volumes, discount rates and future development and operating costs. Changes in these variables could significantly impact the faircarrying value of the net identifiable assets and liabilitiesassets. Specific judgement is required in the identification of the acquired business. The goodwill balanceintangible assets.
GOODWILL
Goodwill is assessed for impairment annually or when facts and circumstances indicate that it is impaired. Goodwill is tested for impairment at a CGU level by comparing the carrying amount to the recoverable amount, which is determined as the greater of fair value less costs of disposal and value in use. Any excess of the carrying amount over the recoverable amount is the impaired amount. The recoverable amount estimates are categorized as Level 3 according to the fair value hierarchy. Impairment charges are recognized in net income.earnings. Goodwill is reported at cost less any accumulated impairment. Goodwill impairments are not reversed.
Non-controlling interestsNON-CONTROLLING INTERESTS
The Company recognizes non-controlling interests in an acquired entity either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets, determined on an acquisition-by-acquisition basis.
New accounting standardsLoss of control
The Company has adopted the following standards effective January 1, 2019:
|
|
On January 1, 2019,When the Company adopted IFRS 16, “Leases” usingloses control over a subsidiary, it derecognizes the modified retrospective approach which replaces IAS 17 Leases, which came into effect for annual periods beginning onassets and liabilities of the subsidiary, and any related non-controlling interest and other components of equity. Any resulting gain or after January 1, 2019. The modified retrospective approach does not require restatement of comparative financial information as it recognizes the cumulative effect on transition as an adjustment to openingloss is recognized in profit or loss. Any interest retained earnings and applies the standard prospectively. Comparative information in the Company's consolidated statements of financial position, consolidated statements of loss and comprehensive loss, consolidated statements of changes in equity, and consolidated statements of cash flows has not been restated.former subsidiary is measured at fair value when control is lost.
Under the new standard, aLEASES
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
As a lessee
The Company recognizes a right-of-use asset and a lease obligation at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease obligation. Depreciation is recognized on the lease asset over the shorter of the estimated useful life of the asset or the lease term. The lease obligation is initially measured at the present value of the lease payments that have not been paid at the commencement date, discounted at the rate implicit in the lease or,
F-13
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
if that rate cannot be readily determined, the Company’s incremental borrowing rate. The lease obligation is subsequently increased by the interest cost on the lease obligation and decreased by lease payments made. Lease payments are allocated between the liability and interest expense. Interest expense is recognized on the lease obligation using the effective interest rate method and payments are applied against the lease obligation.
F-15
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The carrying amounts of the right-of-use assets, lease obligations, and the resulting interest and depreciation expense are based on the implicit interest rate within the lease arrangement or, if this information is unavailable, the incremental borrowing rate. Incremental borrowing rates are based on judgmentsjudgements including economic environment, term, and the underlying risk inherent to the asset.
Impacts on TransitionAs a lessor
TheWhen the Company acts as a lessor, it determines at lease assets were initially recognizedinception whether each lease is a finance lease or an operating lease. To classify each lease, the Company makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. Under a finance lease, the Company recognizes a receivable at an amount equal to the discountednet investment in the lease which is the present value of the aggregate of lease payments usingreceivable by the lessor. Under an incremental borrowing rate of 5.95%.
The adoption of IFRS 16 using the modified retrospective approach allowedoperating lease, the Company to userecognizes lease payments received as income on a straight-line basis over the following practical expedientslease term. When the Company is an intermediate lessor, it accounts for its interests in determining the opening transition adjustment:
The weighted average incremental borrowing rate in effect at January 1, 2019 was used as opposedhead lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the rate in effect at inception ofright-of-use asset arising from the lease;
Leaseshead lease, not with reference to the underlying asset.
GOVERNMENT GRANTS
Government grants are recognized when there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. If a term of less than 12 months as at January 1, 2019 were accounted for as short-term leases;
Leasesgrant is received but reasonable assurance and compliance with an underlying asset of low value are recorded as an expense andconditions is not achieved, the grant is recognized as a lease asset; and
Leases with similar characteristics were accounted fordeferred liability until such conditions are fulfilled. When the grant relates to an expense item in nature, it is recognized as “government subsidies” in profit or loss on a portfolio using a single discount rate.systematic basis in the period in which the costs are incurred.
Captive Insurance
The cumulative effectCompany has secured insurance coverage for its directors and officers through two separate captive insurance structures.
The first structure is a captive cell program entered into with a registered insurer for the purpose of holding and managing the Company’s coverage funds through a separate cell account (“Cell Captive”). The Company applies IFRS 10 “Consolidated Financial Statements” in its assessment of control as it relates to the Cell Captive. The Company’s accounting policy is to consolidate the Cell Captive. The Cell Captive funds are held as cash and may be invested according to the Company’s treasury policy. The funds are disclosed as restricted cash as the Cell Captive must be fully funded at all times. The Company will recognize any gains or losses from fair market value adjustments, interest and/or foreign exchange in the statements of income (loss) and comprehensive income (loss).
The second structure is a wholly owned subsidiary, Sundial Insurance (Bermuda) Ltd. (“SIBL”), incorporated to provide separate and additional coverage. The Company applies IFRS 10 “Consolidated Financial Statements” in its assessment of control as it relates to SIBL. The Company’s accounting policy is to consolidate SIBL. The funds are disclosed as restricted cash as the funds were required for initial applicationcapitalization of the standard wasentity and there is a requirement to recognizemaintain minimum capital and surplus in accordance with industry regulations.
NEW ACCOUNTING STANDARDS
The following accounting standards were effective for annual periods beginning on or after January 1, 2021 and did not have a $1.3 million increase to right-of-use assets ("Lease assets"), and a $1.3 million increase to lease obligations. Thematerial impact on transition is summarized below:the Company’s consolidated financial statements:
| ||||
|
| |||
|
|
On transition•COVID-19 Related Rent Concessions (Amendments to IFRS 16, a reconciliation of the lease assets16)
•Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and lease obligations recognized by the Company is as follows:IFRS 16)
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
|
In October 2018, the International Accounting Standards Board (IASB) issuedThere are new accounting standards, amendments to accounting standards and interpretations that are effective for annual periods beginning on or after January 1, 2022, that have not been applied in preparing the definition ofconsolidated financial statements for the year ended December 31, 2021. These standards and interpretations are not expected to have a business in IFRS 3 Business Combinations. These amendments are intended to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.material impact on the Company’s consolidated financial statements and include:
IFRS 3 continues to adopt a market participant’s perspective to determine whether an acquired set of activities and assets is a business. The amendments include the following:
Remove the assessment of whether market participants are capable of replacing any missing elements;
Add guidance to help entities assess whether an acquired process is substantive;
Narrow the definition of a business and of outputs; and
Introduce an optional fair value concentration test.
F-14F-16
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The IASB also added examples•Onerous contracts – Cost of Fulfilling a Contract (Amendments to illustrate the application of the guidance in IAS 37)
•IFRS on the definition of a business. The amendments17 Insurance Contracts (Amendments to IFRS 3 are effective for annual reporting periods beginning on or after January 1, 2020 with early adoption permitted.17)
4. | Significant accounting estimates, assumptions and judgements |
The preparation of these consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Judgement is used mainly in determining whether a balance or transaction should be recognized in the consolidated financial statements. Estimates and assumptions are mostly used in determining the measurement of recognized transactions and balances. However, judgements and estimates are often interrelated.
Judgements, estimates and assumptions are continually evaluated and are based on factors including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in future periods affected.
Judgements, assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment include the following:
ImpairmentsIMPAIRMENTS
CGU’s are defined as the lowest grouping onof integrated assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The classification of assets into CGU’s requires significant judgement and interpretations with respect to the integration between assets, the existence of active markets, external users, shared infrastructures and the way in which management monitors the Company’s operations.
The recoverable amounts of CGU’s and individual assets have been determined as the higher of the CGU’s or the asset’s fair value less costs of disposal and its value in use. These calculations require the use of estimates and assumptions and are subject to changes as new information becomes available including information on the likelihood of obtaining future licenseslicences from Health Canada, demand for cannabis for recreationaltotal addressable market, market share escalation factor, gross margin escalation factor, terminal multiple and medical purposes, future selling prices, expected sales volumes, discount rates and future development and operating costs.rates. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets and CGU’s.
Biological assets and inventoryBIOLOGICAL ASSETS AND INVENTORY
Biological assets, comprising cannabis plants and agricultural product consisting of cannabis, and ornamental flowers, are measured at fair value less costs to produce and sell up to the point of harvest.
Determination of the fair values of the biological assets and the agricultural product requires the Company to make assumptions about how market participants assign fair values to these assets. These assumptions primarily relate to the level of effort required to bring the cannabis up to the point of harvest, costs to convert the harvested cannabis to finished goods, sales price, risk of loss, expected future yields from the cannabis plants and estimating values during the growth cycle.
The valuation of biological assets at the point of harvest is used as the measurement basis for all cannabis-based inventory and thus any critical estimates and judgements related to the valuation of biological assets are also applicable to inventory. The valuation of work-in-progress and finished goods also requires the estimate of conversion costs incurred, which become part of the carrying amount of the inventory. The Company must also determine if the carrying value of any inventory exceeds its net realizable value, such as cases where prices have decreased, or inventory has spoiled or has otherwise been damaged.
Revenue
Government customers typically have a right of product return, and in some cases, the right to pricing adjustments for products that are subsequently discounted or sold for a lower price in another jurisdiction. Licensed Producers can, in some cases, have a right of product return or warranty period. The estimate of potential future returns and pricing adjustments includes the use of estimates and assumptions and are subject to change as new information becomes available.
Deferred tax assets
Deferred tax assets, including those arising from tax loss carry-forwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash
F-15F-17
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
flows. In addition,some cases, have a right of product return or warranty period. The estimate of potential future changes in tax laws could limitreturns includes the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be affected.
Share-based compensation
The fair value of share-based compensation expenses is estimated using the Black-Scholes pricing model and relies on a numberuse of estimates suchand assumptions and are subject to change as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted.new information becomes available.
Convertible instrumentsCONVERTIBLE INSTRUMENTS
Convertible notes are compound financial instruments which are accounted for separately by their components: a financial liability and an equity instrument. The financial liability, which represents the obligation to pay coupon interest on the convertible notes in the future, is initially measured at its fair value and subsequently measured at amortized cost. The residual amount is accounted for as an equity instrument at issuance.
The identification of the components of convertible notes is based on interpretations of the substance of the contractual arrangement and therefore requires judgement from management. The separation of the components affects the initial recognition of the convertible debenture at issuance and the subsequent recognition of interest on the liability component. The determination of the fair value of the liability is also based on various assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.
Financial obligationsThe derivative warrant liabilities are financial liabilities measured at FVTPL. The determination of the fair value of the liabilities are estimated based on various assumptions, including future share price, volatility, discount rate and various probability factors.
The financial obligation arising pursuant to a royalty agreement, requires management to make assumptions and use judgement in determining the generation of future revenues and an appropriate discount rate.
AcquisitionsACQUISITIONS
The Company assesses whether an acquisition should be accounted for as an asset acquisition or a business combination under IFRS 3. This assessment requires management to make judgements on whether the assets acquired and liabilities assumed constitute a business as defined in IFRS 3 and if the integrated set of activities, including inputs and processes acquired, is capable of being conducted and managed as a business and the Company obtains control of the business inputs and processes.
FairInvestments
The Company’s investment at FVTPL is a financial asset measured at fair value each reporting period. The determination of assets acquired and liabilities assumed in a business combination
Thethe fair value of assets acquiredthe investment requires judgement from management and liabilities assumedthe main assumption is the discount rate.
equity-accounted investees
The Company’s interest in a business combination, including contingent considerationjoint venture is accounted for using the equity-method. The current investment portfolio of the joint venture is comprised of secured debt and goodwill,hybrid instruments which include options and warrants. These investments are recorded at fair value each reporting period with any changes in fair value recorded through profit or loss.
The determination of the fair value of the underlying investments is estimated based on information available at the date of acquisition. Various valuation techniques are applied for measuring fair value including market comparablesa discounted cash methodology and requires judgement from management. The discounted cash flows which relyare based on various assumptions, such as future sellingincluding an estimation of market prices, expected sales volumes,volatility and discount rates and future development and operating costs. Changes in these variables could significantly impact the carrying value of the net assets. Specific judgement is required in the identification of intangible assets.rates.
5. | Business |
|
|
On February 22, 2019,May 5, 2021, the Company through its wholly owned subsidiary, Sundial UK Limited, signed a Sale and Purchase AgreementInner Spirit Holdings Ltd. (“SPA”Inner Spirit”) announced that they had entered into an arrangement agreement pursuant to acquirewhich the Company acquired all of the issued and outstanding common shares of Project Seed Topco (“Bridge Farm”) a private company located in the United Kingdom of Great Britain and Northern Ireland (“UK”Inner Spirit (the “Inner Spirit Transaction”). Bridge Farm was acquired to expand the Company’s business to cannabidiol (“CBD”) extraction and production, subject to certain regulatory, licensing and other restrictions, to launch CBD sales in the UK. The acquisitionInner Spirit Transaction closed on July 2, 2019.20, 2021. Inner Spirit is a retailer and franchisor of Spiritleaf recreational cannabis stores across Canada, with a network that includes more than 100 franchised and corporate-owned locations.
The acquisitionInner Spirit Transaction consideration was comprised of:of (i) an aggregate $92.6 million cash ($0.30 in cash for each Inner Spirit common share), (ii) an aggregate 24.4 million Sundial common shares valued at $26.2 million based on the fair value of each common share of the Company on the closing date (0.0835 of a Sundial common share for each Inner Spirit common share) and (iii) contingent consideration valued at $1.2 million representing the fair value of Inner Spirit warrants.
|
|
|
|
|
|
F-16F-18
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company has engaged independent valuation experts to assist in determining the fair value of certain assets acquired and liabilities assumedassumed. The purchase price allocation and relatedthe amount of deferred income tax impacts.taxes arising on their recognition is not final as the Company is continuing to verify information required to determine the fair value of property, plant and equipment, net investment in subleases, goodwill and lease liabilities.The Company expects a portion of goodwill to be allocated to intangible assets upon finalization of the purchase price allocation.
The fair value of consideration paid was as follows:
July 20, 2021 | |||
Cash | 92,583 | ||
Issuance of common shares | 26,216 | ||
Contingent consideration | 1,150 | ||
119,949 |
The fair value of the assets and liabilities acquired was as follows:
| July 2, 2019 |
| Adjustments |
| December 31, 2019 |
| |||
Cash |
| 77,023 |
|
| — |
|
| 77,023 |
|
Issuance of common shares |
| 37,248 |
|
| — |
|
| 37,248 |
|
Contingent consideration |
| 15,630 |
|
| 361 |
|
| 15,991 |
|
|
| 129,901 |
|
| 361 |
|
| 130,262 |
|
July 20, 2021 | |||
Cash | 9,808 | ||
Accounts receivable | 750 | ||
Prepaid expenses and deposits | 853 | ||
Inventory | 2,733 | ||
Property, plant and equipment | 12,108 | ||
Net investment in subleases | 23,751 | ||
Goodwill | 114,537 | ||
Accounts payable and accrued liabilities | (2,678 | ) | |
Convertible debentures | (12,025 | ) | |
Lease liabilities | (29,481 | ) | |
Financial guarantee liability | (407 | ) | |
119,949 |
The purchase price was allocated as follows:
| July 2, 2019 |
| Adjustments |
| December 31, 2019 |
| |||
Accounts receivable |
| 7,403 |
|
| — |
|
| 7,403 |
|
Inventory |
| 469 |
|
| 1 |
|
| 470 |
|
Biological assets |
| 1,233 |
|
| 55 |
|
| 1,288 |
|
Property, plant and equipment |
| 57,717 |
|
| 651 |
|
| 58,368 |
|
Intangible assets |
| 25,636 |
|
| (165 | ) |
| 25,471 |
|
Accounts payable |
| (14,293 | ) |
| — |
|
| (14,293 | ) |
Long term debt |
| (33,618 | ) |
| — |
|
| (33,618 | ) |
Lease obligations |
| (15,567 | ) |
| 388 |
|
| (15,179 | ) |
Deferred income tax liability |
| (3,038 | ) |
| (1,317 | ) |
| (4,355 | ) |
Goodwill |
| 103,959 |
|
| 748 |
|
| 104,707 |
|
|
| 129,901 |
|
| 361 |
|
| 130,262 |
|
The Company recorded adjustments to the fair value in the fourth quarter of 20192021 to reflect facts and circumstances in existence at the date of the acquisition. These adjustments primarily relaterelated to the inclusion of Spirit Lead Ontario Inc. and changes in preliminary valuation assumptions, including refinement of biological assets,amounts allocated to property, plant and equipment, net investments in subleases, intangible assets, lease liabilities and deferred income tax liability based on new information that became available that existed at the date of the acquisition.liability. All measurement period adjustments were offset to goodwill. It is expected that further allocations will be made between these account categories upon finalization of the preliminary purchase price allocation prior to the end of the second quarter of 2022.
As new information obtained within one year of the date of acquisition about facts and circumstances that existed at the date of acquisition identifies adjustments to the above amounts, then the accounting for the acquisition will be revised.
On October 10, 2019,August 4, 2021, the earn-out payment terms wherebyCompany settled the sellers would be entitled to earn from nil to a maximumconvertible debenture liability through the issuance of an additional 1.62.5 million common shares valued at $2.7 million and a cash payment of $9.3 million. Due to the change of control from the Inner Spirit Transaction, debenture holders were entitled to receive Sundial common shares and a cash payment based on a prescribed formula based on future earnings were replaced with the following terms:formula.
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2019, theThe fair value of the incremental share portionInner Spirit warrants has been estimated as $1.2 million and is made up of the contingent consideration was adjusted to $27.5following components: (i) equity component of $1.8 million (note 23(c)), (ii) liability component of $0.3 million and the fair value(iii) asset component of the earn out portion was adjusted to $5.0 million. These adjustments resulted in a loss on contingent consideration of $18.6$0.9 million.
The consolidated financial statements incorporate the operations of Bridge FarmInner Spirit commencing July 2, 2019.20, 2021. During the period July 2, 201920, 2021, to December 31, 2019,2021, the Company recorded revenues of $12.3$16.1 million and a net lossearnings of $124.5 million relating to the operations of Bridge Farm, which includes the $100.3 million goodwill impairment noted below.
$1.1 million. Had the acquisition closed on January 1, 2019,2021, management estimates that for the period January 1, 20192021, to July 1, 2019,19, 2021, revenue would have increased by an additional $23.7$20.4 million and net lossearnings would have increased by $19.5 million,$7.4 million. In determining these amounts, management assumes the fair values on the date of acquisition would have been the same as if the acquisition had occurred on January 1, 2019.
|
|
At December 31, 2019, the Company recorded a goodwill impairment of $100.3 million based on significant delays and uncertainties in the licensing and regulatory framework in the U.K. The goodwill impairment was recognized in the Bridge Farm CBD CGU and is the full amount of goodwill that was attributable to this CGU. The Bridge Farm CBD CGU is the business line focused on developing a CBD business in the U.K. The recoverable amount of the CGU was determined to be its fair value less costs of disposal and is categorized as level 3 in the fair value hierarchy.
F-17
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Management has determined that because the Bridge Farm acquisition was completed within the last 12 months and that the Clay Lake assets are newly constructed, the fair value less costs of disposal would not be lower than the carrying amount of the tangible assets.
|
|
On March 13, 2019, the Company acquired 50% of the issued and outstanding shares of Pathway RX Inc. (“Pathway”), which was a private company.
Pathway was acquired to develop cannabis-based pharmaceutical drugs to treat symptoms associated with a wide range of medical conditions.
The purchase price was as follows:
|
| |||
|
| |||
|
|
|
The purchase price was allocated as follows:
| March 13, 2019 |
| Adjustments |
| December 31, 2019 |
| |||
Intangible assets |
| 13,368 |
|
| 184 |
|
| 13,552 |
|
Accounts payable and accrued liabilities |
| — |
|
| (184 | ) |
| (184 | ) |
Deferred tax liability |
| (3,609 | ) |
| — |
|
| (3,609 | ) |
Non-controlling interest (50%) |
| (4,879 | ) |
| — |
|
| (4,879 | ) |
|
| 4,880 |
|
| — |
|
| 4,880 |
|
The shares in Pathway were acquired by issuance of 296,800 common shares of the Company at a price of $8.76 per common share to the acquired company’s existing shareholders. In conjunction with the acquisition, the Company entered into a license agreement that provides for use of Pathway’s intellectual property in exchange for:
|
|
|
|
|
|
Pathway consisted solely of intellectual property comprising the identifiable net assets of the entity. The non-controlling interest recognized at the acquisition date was recorded at their proportionate 50% share of the fair value of the identifiable net assets. Net loss attributable to the non-controlling interest for the year ended December 31, 2019 was $165.0 thousand.
Subsequent to recording the purchase price allocation, the deferred tax liability was adjusted to nil with the offsetting adjustment to income tax recovery on the basis that both the Company and the acquired private company are subject to income tax under the same taxation authority.
The Company recorded adjustments to the preliminary fair value to reflect facts and circumstances in existence as of the date of acquisition. These adjustments primarily related to accounts payable and accrued liabilities based on new information available that existed at the date of acquisition. These measurement adjustments were offset to the fair value of intangible assets.
F-18
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company’s reportable segments are based on geographic location and nature of the underlying operations. The Cannabis segment is located in Canada and the Ornamental Flowers segment is located in the United Kingdom. Cannabis operations includes legal cultivation and distribution of cannabis products under federally regulated licenses issued by Health Canada. The ornamental flower business represents the legacy operations of Bridge Farm that were included in the acquisition and capital expansion activities. The Corporate segment includes all corporate activities and items not allocated to reportable operating segments. For the ten months ended December 31, 2018, there was only one reportable segment. The Ornamental Flower segment arose from the acquisition of Bridge Farm during the year ended December 31, 2019 (note 5a).
As at December 31, 2019 | Cannabis |
| Ornamental Flowers |
| Corporate |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| 375,849 |
|
| 134,187 |
|
| — |
|
| 510,036 |
|
Total liabilities |
| 227,024 |
|
| 61,814 |
|
| — |
|
| 288,838 |
|
Capital expenditures |
| 110,271 |
|
| 27,864 |
|
| — |
|
| 138,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
| 63,562 |
|
| 12,298 |
|
| — |
|
| 75,860 |
|
Cost of sales |
| 46,721 |
|
| 9,426 |
|
| — |
|
| 56,147 |
|
Gross margin before fair value adjustments |
| 16,841 |
|
| 2,872 |
|
| — |
|
| 19,713 |
|
Change in fair value of biological assets |
| 30,340 |
|
| 386 |
|
| — |
|
| 30,726 |
|
Change in fair value of biological assets realized through inventory sold |
| (10,685 | ) |
| — |
|
| — |
|
| (10,685 | ) |
Gross margin |
| 36,496 |
|
| 3,258 |
|
| — |
|
| 39,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
| 35,639 |
|
| 5,515 |
|
| 3,295 |
|
| 44,449 |
|
Other expenses |
| 11,417 |
|
| (959 | ) |
| — |
|
| 10,458 |
|
Depreciation and amortization |
| 595 |
|
| 3,482 |
|
| — |
|
| 4,077 |
|
Share-based compensation |
| 15,809 |
|
| — |
|
| 23,715 |
|
| 39,524 |
|
Asset impairment |
| 162 |
|
| — |
|
| — |
|
| 162 |
|
Goodwill impairment |
| — |
|
| 100,305 |
|
| — |
|
| 100,305 |
|
Loss from operations |
| (27,126 | ) |
| (105,085 | ) |
| (27,010 | ) |
| (159,221 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs |
| — |
|
| — |
|
| (10,069 | ) |
| (10,069 | ) |
Finance costs |
| (27,781 | ) |
| (417 | ) |
| — |
|
| (28,198 | ) |
Loss on financial obligation |
| (60,308 | ) |
| — |
|
| — |
|
| (60,308 | ) |
Other |
| 8 |
|
| (18,467 | ) |
| — |
|
| (18,459 | ) |
Loss before tax |
| (115,207 | ) |
| (123,969 | ) |
| (37,079 | ) |
| (276,255 | ) |
|
|
| December 31, 2019 |
| December 31, 2018 |
| ||
Trade receivables |
| 24,684 |
|
| 209 |
|
Other receivables |
| 2,954 |
|
| 2,529 |
|
|
| 27,638 |
|
| 2,738 |
|
2021.
F-19
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company incurred acquisition-related costs of $1.9 million which have been included in transaction costs.
6. | Discontinued operations |
On May 15, 2020, the Company entered into an agreement to sell all of the outstanding shares of Project Seed Topco (“Bridge Farm”) which closed on June 5, 2020.
The comparative statement of loss and comprehensive loss and statement of cash flows has been presented to show the discontinued operation separately from continuing operations.
Results of discontinued operations
|
| Year ended December 31 |
| |||||||||
|
| 2021 |
|
| 2020 (1) |
|
| 2019 (2) |
| |||
Gross revenue |
|
| — |
|
|
| 22,139 |
|
|
| 12,298 |
|
Net revenue |
|
| — |
|
|
| 22,139 |
|
|
| 12,298 |
|
Cost of sales |
|
| — |
|
|
| 15,633 |
|
|
| 9,426 |
|
Gross margin before fair value adjustments |
|
| — |
|
|
| 6,506 |
|
|
| 2,872 |
|
Change in fair value of biological assets |
|
| — |
|
|
| 1,064 |
|
|
| 386 |
|
Change in fair value realized through inventory |
|
| — |
|
|
| (1,122 | ) |
|
| — |
|
Gross margin |
|
| — |
|
|
| 6,448 |
|
|
| 3,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
| — |
|
|
| 8,585 |
|
|
| 5,515 |
|
Sales and marketing |
|
| — |
|
|
| 1,418 |
|
|
| 820 |
|
Depreciation and amortization |
|
| — |
|
|
| 2,752 |
|
|
| 3,482 |
|
Foreign exchange |
|
| — |
|
|
| 1,057 |
|
|
| (1,779 | ) |
Share-based compensation |
|
| — |
|
|
| (826 | ) |
|
| 826 |
|
Goodwill impairment |
|
| — |
|
|
| — |
|
|
| 100,305 |
|
Loss from operations |
|
| — |
|
|
| (6,538 | ) |
|
| (105,911 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs |
|
| — |
|
|
| — |
|
|
| (1,588 | ) |
Finance costs |
|
| — |
|
|
| (10,083 | ) |
|
| (3,982 | ) |
Loss on contingent consideration |
|
| — |
|
|
| (2,252 | ) |
|
| (18,645 | ) |
Gain on investment |
|
| — |
|
|
| — |
|
|
| 165 |
|
Gain on disposition of PP&E |
|
| — |
|
|
| — |
|
|
| 13 |
|
Loss on disposition of Bridge Farm |
|
| — |
|
|
| (14,979 | ) |
|
| — |
|
Loss before income tax |
|
| — |
|
|
| (33,852 | ) |
|
| (129,948 | ) |
Income tax recovery |
|
| — |
|
|
| 225 |
|
|
| 1,017 |
|
Net loss (3) |
|
| — |
|
|
| (33,627 | ) |
|
| (128,931 | ) |
(1) | Period January 1, 2020, to June 5, 2020 |
(2) | Period July 2, 2019, to December 31, 2019 |
(3) | Net loss from the discontinued operations is attributable entirely to the owners of the Company. |
F-20
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Effect of disposal on the financial position of the company
Cash and cash equivalents | 2,963 | |||
Accounts receivable | 15,641 | |||
Biological assets | 2,831 | |||
Inventory | 787 | |||
Property, plant and equipment | 88,698 | |||
Goodwill | 11,345 | |||
Intangible assets | 23,884 | |||
Accounts payable and accrued liabilities | (22,792 | ) | ||
Lease obligation | (14,894 | ) | ||
Deferred tax liability | (3,115 | ) | ||
Accumulated other comprehensive income | (7,466 | ) | ||
Net assets and liabilities | 97,882 | |||
Consideration received | ||||
Term Debt Facility | 45,000 | |||
Contingent consideration liability | 34,912 | |||
Cancellation of common shares | 2,991 | |||
Total consideration | 82,903 | |||
Loss on disposition | (14,979 | ) |
7. | Segment information |
Late in the fourth quarter of 2020 the Company began the deployment of capital toward strategic investments. The Company developed an internal capital program to evaluate these and potential future investments, which is a new and separate business line from its cannabis operations.
Based on the allocation of the Company’s resources by the chief operating decision maker and the information used to analyze the performance of the business, the Company concluded that beginning in Q1 2021, it had 2 reportable segments: cannabis operations and investments. The acquisition of Inner Spirit (note 5) has led to a third reportable segment: retail operations. For the year ended December 31, 2020, there was only 1 reportable segment and therefore no comparative segment information.
The Company’s reportable segments are organized by business line and are comprised of 3 reportable segments: cannabis operations, retail operations and investments. Cannabis operations include the cultivation, distribution and sale of cannabis for the adult-use market and medical markets in Canada. Retail operations include the private sale of recreational cannabis through wholly owned and franchise retail cannabis stores. Investments include the deployment of capital to investment opportunities. Certain overhead expenses not directly attributable to any reportable segment are reported as “Corporate”.
|
| Cannabis |
|
| Retail (1) |
|
| Investments |
|
| Corporate |
|
| Total |
| |||||
As at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
| 147,887 |
|
|
| 153,624 |
|
|
| 1,093,596 |
|
|
| 29,155 |
|
|
| 1,424,262 |
|
Year ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
| 40,037 |
|
|
| 16,091 |
|
|
| 0 |
|
|
| 0 |
|
|
| 56,128 |
|
Gross margin |
|
| (15,499 | ) |
|
| 8,509 |
|
|
| 0 |
|
|
| 0 |
|
|
| (6,990 | ) |
Interest and fee revenue |
|
| 0 |
|
|
| 0 |
|
|
| 13,149 |
|
|
| 0 |
|
|
| 13,149 |
|
Loss on marketable securities |
|
| 0 |
|
|
| 0 |
|
|
| (44,501 | ) |
|
| 0 |
|
|
| (44,501 | ) |
Share of profit of equity-accounted investees |
|
| 0 |
|
|
| 0 |
|
|
| 32,913 |
|
|
| 0 |
|
|
| 32,913 |
|
Depreciation and amortization |
|
| 3,108 |
|
|
| 721 |
|
|
| 0 |
|
|
| 897 |
|
|
| 4,726 |
|
Earnings (loss) before tax |
|
| (117,990 | ) |
|
| 1,835 |
|
|
| (5,837 | ) |
|
| (110,461 | ) |
|
| (232,453 | ) |
F-21
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Geographical disclosure
As at December 31, 2021, the Company had non-current assets related to operations in the United States of $412.9 million. For the year ended December 31, 2021, share of profit of equity-accounted investees related to operations in the United States was $32.9 million.
8. | Restricted cash |
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Letters of credit |
| 0 |
|
| 5,333 |
|
Securities collateral |
| 7,773 |
|
| 0 |
|
Captive insurance |
| 19,240 |
|
| 0 |
|
|
| 27,013 |
|
| 5,333 |
|
Securities collateral is comprised of a cash balance to satisfy margin requirements on the Company’s option trading position.
The Company has secured insurance coverage for its directors and officers through two separate captive insurance structures. The first structure is a captive cell program entered into with a registered insurer for the purpose of holding and managing the Company’s coverage funds through a separate Cell Captive. The Cell Captive was funded with $12.1 million and is required to be fully funded at all times. The second structure is a wholly incorporated subsidiary, Sundial Insurance (Bermuda) Ltd., which was incorporated to provide separate and additional coverage and funded with $7.1 million.
9. | Marketable securities |
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Balance, beginning of year |
| 0 |
|
| 0 |
|
Additions |
| 158,101 |
|
| 0 |
|
Dispositions |
| (9,663 | ) |
| 0 |
|
Change in fair value recognized in profit or loss |
| (64,714 | ) |
| 0 |
|
Balance, end of period |
| 83,724 |
|
| 0 |
|
During the year ended December 31, 2021, proceeds of $29.9 million were received for dispositions of marketable securities and a gain on disposition of $20.2 million was recognized (note 26).
Marketable securities have been designated as FVTPL (note 32).
The components of marketable securities are as follows:
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Equity securities |
| 83,802 |
|
| 0 |
|
Put and call options |
| (78 | ) |
| 0 |
|
|
| 83,724 |
|
| 0 |
|
10. | Accounts receivable |
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Trade receivables |
| 10,865 |
|
| 15,786 |
|
Other receivables |
| — |
|
| 112 |
|
|
| 10,865 |
|
| 15,898 |
|
F-22
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company has calculated ECLs based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions. Refer to note 32 for credit risk disclosures.
11. | Biological assets |
The Company’s biological assets consist of cannabis plants in various stages of vegetation, including plants which have not been harvested, and a variety of flowers in various stages of growth.harvested. The change in carrying value of biological assets areis as follows:
| December 31, 2019 |
| December 31, 2018 |
| ||||||||
As at | December 31, 2021 |
| December 31, 2020 |
| ||||||||
Balance, beginning of year |
| 876 |
|
| 54 |
|
| 3,531 |
|
| 14,309 |
|
Increase in biological assets due to capitalized costs |
| 62,331 |
|
| 2,537 |
|
| 25,880 |
|
| 39,957 |
|
Net change in fair value of biological assets |
| 30,726 |
|
| (1,280 | ) |
| 4,708 |
|
| 6,496 |
|
Transferred to inventory upon harvest |
| (80,991 | ) |
| (435 | ) |
| (29,709 | ) |
| (54,388 | ) |
Acquisitions (note 5a) |
| 1,288 |
|
| — |
| ||||||
Disposition of Bridge Farm (note 6) |
| 0 |
|
| (2,831 | ) | ||||||
Foreign currency translation |
| 79 |
|
| — |
|
| 0 |
|
| (12 | ) |
Balance, end of year |
| 14,309 |
|
| 876 |
|
| 4,410 |
|
| 3,531 |
|
Biological assets are valued in accordance with IAS 41 and are presented at their fair value less costs to sell up to the point of harvest. This is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price less costs to produce and sell per gram.
Cannabis plants
The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. The Company’s method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest.
Management believes the most significant unobservable inputs and their impact on fair value of biological assets are as follows:
Assumption | Input | Weighted average input |
| Effect of 10% change ($000s) |
| Input | Weighted average input |
| Effect of 10% change ($000s) |
| ||||||||||||||||
|
| December 31 2019 |
| December 31 2018 |
| December 31 2019 |
| December 31 2018 |
|
| December 31 2021 |
| December 31 2020 |
| December 31 2021 |
| December 31 2020 |
| ||||||||
Yield per square foot of growing space (1) | Grams |
| 47 |
|
| 45 |
|
| 1,183 |
|
| 87 |
| Grams |
| 49 |
|
| 45 |
|
| 435 |
|
| 347 |
|
Average net selling price (2) | $/gram |
| 5.47 |
|
| 5.25 |
|
| 3,021 |
|
| 294 |
| $/gram |
| 4.49 |
|
| 5.13 |
|
| 1,014 |
|
| 1,022 |
|
After harvest cost to complete and sell | $/gram |
| 2.34 |
|
| 0.70 |
|
| 267 |
|
| 39 |
| $/gram |
| 1.06 |
|
| 1.32 |
|
| 249 |
|
| 291 |
|
| (1) | Varies by strain; obtained through historical growing results or grower estimate if historical results are not available. |
| (2) | Varies by strain and sales market; obtained through average selling prices or estimated future selling prices if historical results are not available. |
These assumptions are estimates that are subject to volatility in market prices and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
The Company estimates the harvest yields for cannabis at various stages of growth. As at December 31, 2019, it is estimated that the Company’s biological assets will yield approximately 10,455 kilograms (December 31, 2018 - 2,800 kilograms) of dry cannabis when harvested. During the year ended December 31, 2019 the Company harvested 34,012 kilograms of dry cannabis (ten months ended December 31, 2018 – 337 kilograms).
factors. The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the net change in fair value of biological assets in future periods.
Flowers
Due toThe Company estimates the large varietyharvest yields for cannabis at various stages of plants produced by the Companygrowth. As at December 31, 2021, it is not possible to determineestimated that the costs to sell for each product line due to mixed trolleys being delivered to customers each day and therefore an average has been applied across all plants based on a post-wastage gross margin.
The fair value measurements forCompany’s biological assets have been categorized as Level 2 fair values based on inputs from the international flower market and applied to all unharvested plants at each period end.
F-20
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
| December 31, 2019 |
| December 31, 2018 |
| ||
Harvested cannabis |
| 50,403 |
|
| 435 |
|
Cannabis supplies and consumables |
| 8,808 |
|
| 799 |
|
Ornamental flowers, supplies and consumables |
| 731 |
|
| — |
|
|
| 59,942 |
|
| 1,234 |
|
At December 31, 2019, the Company held 8,380will yield approximately 5,672 kilograms of harvested cannabis (December 31, 20182020 – 3035,507 kilograms) in inventory.of dry cannabis when harvested. During the year ended December 31, 2019, inventories2021, the Company harvested 22,784 kilograms of $45.8 million were recognized as an expense and included in cost of sales (ten monthsdry cannabis (year ended December 31, 2018 - $nil).
|
|
| Land |
| Production facilities |
| Equipment |
| Right of use assets |
| Construction in progress (“CIP”) |
| Total |
| ||||||
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2018 |
| 4,029 |
|
| 3,272 |
|
| 2,976 |
|
| — |
|
| 3,316 |
|
| 13,593 |
|
Additions |
| 1,217 |
|
| 20,064 |
|
| 4,295 |
|
| — |
|
| 50,745 |
|
| 76,321 |
|
Dispositions |
| — |
|
| — |
|
| (17 | ) |
| — |
|
| — |
|
| (17 | ) |
Balance at December 31, 2018 |
| 5,246 |
|
| 23,336 |
|
| 7,254 |
|
| — |
|
| 54,061 |
|
| 89,897 |
|
Adoption of IFRS 16 |
| — |
|
| — |
|
| (327 | ) |
| 1,333 |
|
| — |
|
| 1,006 |
|
Acquisitions (note 5a) |
| 15,860 |
|
| 21,294 |
|
| 247 |
|
| 14,648 |
|
| 6,360 |
|
| 58,409 |
|
Additions |
| 1,517 |
|
| 283 |
|
| 3,393 |
|
| 687 |
|
| 134,183 |
|
| 140,063 |
|
Transfers from CIP |
| 3,406 |
|
| 120,724 |
|
| 13,603 |
|
| — |
|
| (137,733 | ) |
| — |
|
Dispositions |
| (31 | ) |
| — |
|
| (159 | ) |
| (700 | ) |
| — |
|
| (890 | ) |
Foreign currency translation |
| 608 |
|
| 805 |
|
| 10 |
|
| 541 |
|
| 1,160 |
|
| 3,124 |
|
Balance at December 31, 2019 |
| 26,606 |
|
| 166,442 |
|
| 24,021 |
|
| 16,509 |
|
| 58,031 |
|
| 291,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2018 |
| — |
|
| 84 |
|
| 402 |
|
| — |
|
| — |
|
| 486 |
|
Depreciation |
| — |
|
| 228 |
|
| 692 |
|
| — |
|
| — |
|
| 920 |
|
Balance at December 31, 2018 |
| — |
|
| 312 |
|
| 1,094 |
|
| — |
|
| — |
|
| 1,406 |
|
Adoption of IFRS 16 |
| — |
|
| — |
|
| (100 | ) |
| — |
|
| — |
|
| (100 | ) |
Depreciation |
| 3 |
|
| 5,026 |
|
| 2,833 |
|
| 610 |
|
| — |
|
| 8,472 |
|
Impairment |
| — |
|
| — |
|
| — |
|
| — |
|
| 162 |
|
| 162 |
|
Dispositions |
| — |
|
| — |
|
| (130 | ) |
| (248 | ) |
| — |
|
| (378 | ) |
Foreign currency translation |
| — |
|
| 62 |
|
| — |
|
| 1 |
|
| — |
|
| 63 |
|
Balance at December 31, 2019 |
| 3 |
|
| 5,400 |
|
| 3,697 |
|
| 363 |
|
| 162 |
|
| 9,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
| 5,246 |
|
| 23,024 |
|
| 6,160 |
|
| — |
|
| 54,061 |
|
| 88,491 |
|
Balance at December 31, 2019 |
| 26,603 |
|
| 161,042 |
|
| 20,324 |
|
| 16,146 |
|
| 57,869 |
|
| 281,984 |
|
During the year ended December 31, 2019, $0.6 million (ten months ended December 31, 2018 - $0.8 million) in salaries and benefits was capitalized, including $0.6 million (ten months ended December 31, 2018 - $0.3 million) associated with construction in progress. In addition, a total of $1.3 million in interest associated with construction in progress was capitalized during the year ended December 31, 2019 (ten months ended December 31, 2018 - $2.0 million). Construction in progress relates to the construction of production facilities.
Subsequent to December 31, 2019, the Company signed a purchase and sale agreement to sell certain non-core assets within the Cannabis segment, consisting of land, building and equipment, located in Kamloops, British Columbia, for gross proceeds of $2.1 million. The sale closed on March 27, 2020.
F-21
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
| Brands and trademarks |
| Patents |
| Customer relationships |
| Other |
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at February 28, 2018 |
| — |
|
| — |
|
| — |
|
| 523 |
|
| 523 |
|
Balance at December 31, 2018 |
| — |
|
| — |
|
| — |
|
| 523 |
|
| 523 |
|
Additions |
| 5,295 |
|
| — |
|
| — |
|
| — |
|
| 5,295 |
|
Acquisitions (note 5) |
| 2,977 |
|
| 13,551 |
|
| 18,855 |
|
| 3,639 |
|
| 39,022 |
|
Foreign currency translation |
| 114 |
|
| — |
|
| 723 |
|
| 139 |
|
| 976 |
|
Balance at December 31, 2019 |
| 8,386 |
|
| 13,551 |
|
| 19,578 |
|
| 4,301 |
|
| 45,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2018 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Impairment |
| — |
|
| — |
|
| — |
|
| 523 |
|
| 523 |
|
Balance at December 31, 2018 |
| — |
|
| — |
|
| — |
|
| 523 |
|
| 523 |
|
Depreciation |
| 132 |
|
| — |
|
| 982 |
|
| 192 |
|
| 1,306 |
|
Foreign currency translation |
| (1 | ) |
| — |
|
| (6 | ) |
| (1 | ) |
| (8 | ) |
Balance at December 31, 2019 |
| 131 |
|
| — |
|
| 976 |
|
| 714 |
|
| 1,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Balance at December 31, 2019 |
| 8,255 |
|
| 13,551 |
|
| 18,602 |
|
| 3,587 |
|
| 43,995 |
|
In addition to the intangible assets acquired through acquisitions (note 5), On May 1, 2019, the Company purchased intellectual property from Sun 8 Holdings Inc. The intellectual property acquired under this agreement consists of world-wide proprietary rights to certain cannabis product brands, including trademarks. Consideration of $5.3 million under the arrangement consisted of 480,000 common shares of the Company at a price of $11.03. The agreement includes future consideration in the form of warrants to acquire up to 1.8 million common shares at an exercise price of $0.94 per share, subject to vesting conditions contingent upon achieving minimum thresholds of revenue derived from the acquired brands or acquired cultivars over five years. The agreement also includes the following royalty payments, (i) a royalty ranging from $0.25 to $0.35 per gram of dried flower harvested from the acquired cultivars, based on harvest yields achieved, (ii) a royalty ranging from $0.05 to $0.20 per gram of cannabis (other than dried flower) from the acquired cultivars, based on the THC and CBD potency achieved, (iii) a royalty of $0.15 per gram of cannabis produced by certain third-party cultivators, and (iv) a royalty of $0.15 per gram of any cannabis product or item of merchandise sold under any of the acquired brands.
Brands and trademarks relating to the intellectual property purchased from Sun 8 have a remaining useful life of 15 years. The depreciation of brands and trademarks is included in depreciation and amortization expense.
|
|
| December 31, 2019 |
| December 31, 2018 |
| ||
Trade payables |
| 20,228 |
|
| 11,070 |
|
Accrued and other liabilities |
| 37,882 |
|
| 8,254 |
|
|
| 58,110 |
|
| 19,324 |
|
F-22
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
| Interest rate | Maturity | Principal |
| December 31, 2019 |
| December 31, 2018 |
| |||
Syndicated Credit Agreement (a) |
|
|
|
|
|
|
|
|
|
|
|
Syndicated facility | Prime + 2.5% | Aug 27, 2021 |
| 84,000 |
|
| 82,910 |
|
| — |
|
Operating facility | Prime + 2.5% | Aug 27, 2021 |
| 6,000 |
|
| — |
|
| — |
|
Credit Facilities (b) |
|
|
|
|
|
|
|
|
|
|
|
Facility 1, 3 & 4 | Prime + 2.75% | Aug 16, 2020 |
| 5,000 |
|
| — |
|
| 32,159 |
|
Facility 5 & 7 | Prime + 2.25% | Aug 16, 2020 |
| 43,500 |
|
| — |
|
| — |
|
Term Debt Facility (c) |
|
|
|
|
|
|
|
|
|
|
|
First tranche | 9.75% | Jul 27, 2023 |
| 115,000 |
|
| 95,003 |
|
| — |
|
Credit Agreement (d) | 9.00% | May 15, 2019 |
| 30,000 |
|
| — |
|
| — |
|
Loan Agreement (e) | 9.50% | Sep 30, 2019 |
| 10,000 |
|
| — |
|
| 7,000 |
|
Note Agreement (f) |
| Feb 22, 2019 |
| 7,000 |
|
| — |
|
| 8,546 |
|
Promissory Note (g) | 1.0% per month | Mar 25, 2019 |
| 6,931 |
|
| — |
|
| 6,931 |
|
|
|
|
|
|
|
| 177,913 |
|
| 54,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
|
|
|
|
| 177,913 |
|
| 22,477 |
|
Long term |
|
|
|
|
|
| — |
|
| 32,159 |
|
|
|
| ||||
|
| |||
|
|
| ||
|
| |||
|
On August 29, 2019, the Company entered into a Syndicated Credit Agreement with an initial $90.0 million of secured debt facilities comprised of a $84.0 million senior secured term credit facility and a $6.0 million senior secured revolving operating facility (“Syndicated Credit Agreement”). Under the terms of the agreement, the Company has the right to obtain an additional facility, on a project by project basis, from existing or additional lenders, up to a maximum of $50.0 million subject to the consent of the lenders and satisfaction of certain other conditions.
Principal will be repaid in quarterly payments, beginning at the end of the Company’s first fiscal quarter following the covenant conversion date of March 31, 2020 amortized over a 10-year period, with the balance of all borrowings outstanding being due and payable in full on August 27, 2021. Interest will be incurred at either (i) prime plus a margin between 1.25% to 2.5% or (ii) the one-month bankers acceptance rate plus 1%, plus a margin between 2.75% to 4.00%– 27,972 kilograms). The margin level is determined based on the Company’s senior funded debt to EBITDA ratio. Interest on prime loans accrues daily and is payable monthly on the last business day of each month. The Syndicated Credit Agreement is secured by a general security agreement over all present and after acquired personal property and a first floating charge over all other present and after acquired property in Alberta, British Columbia and other Canadian jurisdictions, subject to permitted encumbrances.
As at December 31, 2019, the Company was required to maintain a cash balance of $10.0 million in accordance with the financial covenants contained in the Syndicated Credit Agreement, which has been classified as restricted cash on the statement of financial position. The Company has also classified funds held in trust in support of letters of credit of $5.3 million as restricted cash.
F-23
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Syndicated Credit Agreement contained an interest coverage ratio to be maintained as at the end of the quarter ended September 30, 2019, which was subsequently removed from the agreement.
At December 31, 2019, the Syndicated Credit Agreement, as written, contained certain financial covenants to maintain:
12. |
|
|
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Harvested cannabis |
| 22,710 |
|
| 20,358 |
|
Cannabis supplies and consumables |
| 4,361 |
|
| 5,255 |
|
Retail |
| 2,397 |
|
| 0 |
|
Millwork |
| 35 |
|
| 0 |
|
|
| 29,503 |
|
| 25,613 |
|
During the year ended December 31, 2021, inventories of $48.6 million were recognized in cost of sales as an expense (year ended December 31, 2020 - $51.7 million). During the year ended December 31, 2021, the Company recognized inventory write downs of $17.5 million (year ended December 31, 2020 - $56.9 million), of which $17.0 million (year ended December 31, 2020 - $45.9 million) was recognized as an impaired and obsolete inventory provision, and $0.5 million (year ended December 31, 2020 - $11.0 million) was included in the change in fair value realized through inventory as the fair value component of the impaired and obsolete inventory provision.
13. |
|
|
|
|
| Land |
| Production facilities |
| Equipment |
| Right of use assets |
| Construction in progress (“CIP”) |
| Total |
| ||||||
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
| 26,606 |
|
| 166,442 |
|
| 24,021 |
|
| 16,509 |
|
| 58,031 |
|
| 291,609 |
|
Additions |
| 8 |
|
| 213 |
|
| 2,886 |
|
| 763 |
|
| 4,319 |
|
| 8,189 |
|
Transfers from CIP |
| 509 |
|
| 8,212 |
|
| 2,287 |
|
| 0 |
|
| (11,008 | ) |
| 0 |
|
Reclass to assets held for sale |
| (1,547 | ) |
| 0 |
|
| 0 |
|
| 0 |
|
| (1,451 | ) |
| (2,998 | ) |
Dispositions |
| (499 | ) |
| (162 | ) |
| (50 | ) |
| (825 | ) |
| (991 | ) |
| (2,527 | ) |
Disposition of Bridge Farm (note 6) |
| (16,300 | ) |
| (21,587 | ) |
| (249 | ) |
| (14,431 | ) |
| (39,734 | ) |
| (92,301 | ) |
Foreign currency translation |
| (137 | ) |
| (181 | ) |
| (1 | ) |
| (122 | ) |
| (347 | ) |
| (788 | ) |
Balance at December 31, 2020 |
| 8,640 |
|
| 152,937 |
|
| 28,894 |
|
| 1,894 |
|
| 8,819 |
|
| 201,184 |
|
Acquisition (note 5) |
| 0 |
|
| 4,169 |
|
| 2,209 |
|
| 5,730 |
|
| 0 |
|
| 12,108 |
|
Additions |
| 0 |
|
| 593 |
|
| 1,975 |
|
| 579 |
|
| 1,209 |
|
| 4,356 |
|
Transfers from CIP |
| 3,748 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| (3,748 | ) |
| 0 |
|
Dispositions |
| 0 |
|
| (468 | ) |
| (301 | ) |
| (165 | ) |
| (177 | ) |
| (1,111 | ) |
Balance at December 31, 2021 |
| 12,388 |
|
| 157,231 |
|
| 32,777 |
|
| 8,038 |
|
| 6,103 |
|
| 216,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization and impairment |
| |||||||||||||||||
Balance at December 31, 2019 |
| 3 |
|
| 5,400 |
|
| 3,697 |
|
| 363 |
|
| 162 |
|
| 9,625 |
|
Depreciation |
| 475 |
|
| 6,249 |
|
| 4,847 |
|
| 638 |
|
| 0 |
|
| 12,209 |
|
Impairment |
| 0 |
|
| 60,658 |
|
| 0 |
|
| 0 |
|
| 5,659 |
|
| 66,317 |
|
Dispositions |
| 0 |
|
| (37 | ) |
| (44 | ) |
| (176 | ) |
| 0 |
|
| (257 | ) |
Disposition of Bridge Farm (note 6) |
| (473 | ) |
| (2,879 | ) |
| 0 |
|
| (251 | ) |
| 0 |
|
| (3,603 | ) |
Foreign currency translation |
| (5 | ) |
| (27 | ) |
| 0 |
|
| (3 | ) |
| 0 |
|
| (35 | ) |
Balance at December 31, 2020 |
| 0 |
|
| 69,364 |
|
| 8,500 |
|
| 571 |
|
| 5,821 |
|
| 84,256 |
|
Depreciation |
| 0 |
|
| 2,914 |
|
| 5,438 |
|
| 897 |
|
| 0 |
|
| 9,249 |
|
Impairment |
| 0 |
|
| 60,000 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 60,000 |
|
Dispositions |
| 0 |
|
| 0 |
|
| (10 | ) |
| (147 | ) |
| 0 |
|
| (157 | ) |
Balance at December 31, 2021 |
| 0 |
|
| 132,278 |
|
| 13,928 |
|
| 1,321 |
|
| 5,821 |
|
| 153,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
| 8,640 |
|
| 83,573 |
|
| 20,394 |
|
| 1,323 |
|
| 2,998 |
|
| 116,928 |
|
Balance at December 31, 2021 |
| 12,388 |
|
| 24,953 |
|
| 18,849 |
|
| 6,717 |
|
| 282 |
|
| 63,189 |
|
|
|
At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, which caused a cross-acceleration under its Term Debt Facility. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility was classified as a current liability on the Company’s statement of financial position.
Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.
In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future.
|
|
As at December 31, 2018, the Credit Facilities were comprised of the following:
Facility 1 – $29.5 million non-revolving development term out facility
Facility 3 – $5.0 million term out facility
Facility 4 – $14.0 million term out facility
As per the December 19, 2018 amended and restated commitment letter (the “Commitment Letter”), on June 1, 2019, Facilities 1 and 4 were refinanced through Facilities 5 and 7, while Facility 3 remained in place. The new Facilities can be summarized as follows:
Facility 3 – $5.0 million term out facility
|
|
Facility 7 – $14.0 million term out facility
|
|
|
|
Following the advances of Facilities 5 and 7, interest was to be incurred at prime plus 2.25%. Interest (on Facilities 3, 5 and 7) and principal (on Facilities 5 and 7 only) were to be paid in quarterly payments at the end of the Company’s first fiscal quarter following such advance, amortized over a 5-year period, with the balance of all borrowings outstanding being due and payable in full on August 16, 2020. The facilities under the Commitment Letter were secured by a general security agreement over all present and after acquired personal property and a floating charge on all lands, subject to permitted encumbrances.
F-24
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
During the year ended December 31, 2021, depreciation expense of $4.9 million was subjectcapitalized to two financial covenants under these facilities as follows:biological assets and inventory (year ended December 31, 2020 – $6.9 million).
|
|
|
|
On August 29, 2019,Due to curtailment in the Credit Facilitiesutilization of $49.0 million plus accrued interest were repaid in full using a portion of the proceeds fromcapacity in the Syndicated Credit Agreement described in section (a) above and are no longer availableCompany’s Olds facility to the Company.
|
|
| ||||
|
| |||
|
|
| ||
|
| |||
|
|
| ||
|
On June 27, 2019,align cannabis production with current demand estimates, the Company entered into a secured credit agreement (the “Term Debt Facility”) through SGI Partnership, a newly formed wholly owned subsidiarydetermined that indicators of the Company.impairment existed at June 30, 2021. The Term Debt Facility is secured on a second-priority basis over all assets of the Company exceptimpairment test for the acquired Bridge Farm assets (note 5a), which are securedCompany’s Olds CGU used a value in use approach based on internal cash flow estimates at June 30, 2021, and a first priority basis. The Term Debt Facility consistsdiscount rate of two tranches totalling $159.6 million, less (i) a 6% original issue discount and (ii) upfront fees totalling up to approximately $2.4 million. The first tranche of $115.0 million, less the original issue discount and upfront fees, was advanced on June 27, 2019 to fund the acquisition of Bridge Farm described in note 5(a)25%. The second tranche was not advanced, and the deadline to advance it has passed. Amounts advanced under the Term Debt Facility bear interest at adiscount rate of 9.75% per annum. Principal will be repaid in quarterly payments beginning June 30, 2020 with the first instalment based on 5% of the principal outstanding and subsequent quarters based on 1.25% of principal outstanding, with the balance of all borrowings outstanding being due and payable in full on July 27, 2023.
In connection with each tranche advanced, the lender is entitled to receive warrants exercisable upon the earlier of (i) the completion of an initial public offering, (ii) December 31, 2020, or (iii) a default or event of default under the Term Debt Facility or certain other specified events. The number of warrants issuable and the exercise price of such warrants issued was indexed to the Company’s share price determined at the date of the completion of an initial public offering. Prior to the completion of the initial public offering, the warrants were classified as a derivative liability measured at FVTPL. The fair value of the warrants was estimated based on the Black-Scholes option pricing model.Company’s weighted average cost of capital, adjusted for risks specific to the CGU. The measurementsestimated cash flows were based on a 5-year model taking into account the overall forecasted Canadian cannabis industry market size and the Company’s forecasted market share. A terminal value thereafter was applied. Based on the analysis, there was an impairment of the Company’s Olds CGU of $60.0 million as at June 30, 2021, as the estimated recoverable amount for this CGU of $70.0 million was lower than the respective carrying amount. The estimated value in use for the warrants wereCompany’s Olds CGU was sensitive to an increase in the discount rate. An increase to the discount rate by 1% would increase the impairment by approximately $7.3 million.
At December 31, 2021, the Company determined that no further indicators of impairment existed or indicators that a previous impairment should be reversed, and no impairment test was required.
During the year ended December 31, 2020, the Company determined that indicators of impairment existed with respect to the Company’s British Columbia CGU as a result of the Company’s disposition of its Kamloops property and decision to suspend further construction and development activities on its Merritt facility due to market conditions and available financing. Approximately $10.0 million had been invested into the Merritt facility which consisted of land and CIP. A test for impairment was performed at March 31, 2020, at the CGU level, by comparing the estimated recoverable amount to the carrying values of the assets. The estimated recoverable amount of the assets was determined to be their fair value less costs of disposal and an impairment of $5.7 million was recorded to write down the assets to their recoverable amount. The fair value measurement is categorized aswithin Level 3 of the fair value hierarchy. The recoverable amount of these assets was further reduced to $2.9 million due to the Company receiving utility deposits back on deferral of construction of the facility. Management is committed to a plan to sell the Merritt facility and the asset is available for immediate sale, resulting in the reclassification to assets held for sale on the consolidated statements of financial position.
During the year ended December 31, 2020, the Company determined that indicators of impairment existed with respect to the Company’s Alberta CGU as a result of decreasing estimates for the size of the potential Canadian cannabis market, the Company curtailing the number of flowering rooms being used for cultivation at its Olds facility and the carrying value of the Company’s total net assets significantly exceeding the Company’s market capitalization. A test for impairment was performed at September 30, 2020, at the CGU level, by comparing the estimated recoverable amount to the carrying values of the assets, using a value in use approach based on internal cash flow estimates and a discount rate of 25%. The discount rate was estimated based on the inputsCompany’s weighted average cost of capital, adjusted for risks specific to the valuation technique used.
In August 2019, upon completionCGU. The estimated cash flows were based on a 5-year model taking into account forecasted Canadian cannabis industry activity market size and Sundial’s forecasted market share. A terminal value thereafter was applied. Based on the analysis, the Company determined there was an impairment of the initial public offering, 957,225 warrants with an exercise priceCompany’s Alberta CGU of $21.63 and 1,495,665 warrants with an exercise price$60.0 million as at September 30, 2020, as the estimated recoverable amount for this CGU of $20.76 were issued.$154.0 million was lower than the respective carrying amount.
On December 28, 2020, the Company announced a concentrates licensing agreement based out of its Rocky View facility. Within the agreement is a non-binding purchase agreement to sell the Rocky View facility for $5.0 million. The Company recorded aestimated recoverable amount of the Rocky View facility was determined to be its fair value adjustmentless costs of $2.2disposal and an impairment of $0.7 million was recorded to finance expense upon reclassification from a derivative liabilitywrite down the assets to equity (note 19c).their recoverable amount of $5.0 million. The fair value measurement is categorized within Level 3 of the fair value hierarchy.
The Company is subject to three financial covenants under this facility, so long asAll of the principal amount owing underabove impairments were recognized in the Term Debt Facility is greater than $75 million, as follows:Company’s cannabis reporting segment.
|
|
|
|
11.0 to 1.0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2020 and each financial quarter thereafter until and including March 31, 2021; and
9.0 to 1.0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2021 and each financial quarter thereafter.
F-25
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
14. | Net investment in subleases |
6.0 to 1.00, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2020 and each financial quarter thereafter until and including March 31, 2021; and
4.5 to 1:0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2021 and each financial quarter thereafter.
As at December 31, 2019, the Company was in compliance with all financial covenants under the Term Debt Facility. However, because, at December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility, which was cross-accelerated, was classified as a current liability on the Company’s statement of financial position.
Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.
Dispositions | — | — | ||||
Balance, end of year | 26,562 | — | ||||
|
|
|
On February 22, 2019, the Company entered into a credit agreement with a Canadian financial institution to provide a $30 million non-revolving term-loan facility (the “Credit Agreement”). The Credit Agreement was secured by a second priority general security agreement over all present and after acquired personal property and a floating charge on all lands, subject to permitted encumbrances, as well as a first priority assignment of all net proceeds from certain future equity or debt offerings. Interest was accrued at 9.00% with principal and interest repayable on or before May 15, 2019 and later extended to May 22, 2019 where principal of $30 million plus accrued interest was repaid in full. The Credit Agreement is no longer available to the Company. The Credit Agreement was subject to various non-financial covenants, with which the Company was in compliance throughout the term of the Credit Agreement.
|
|
|
On April 10, 2019, the Company signed an agreement to amend the Loan Agreement by extending the maturity from May 31, 2019 to September 30, 2019. In addition, the Company secured an additional loan in the principal amount of $3.0 million for a total of $10.0 million. The new loan was subject to interest at a rate of 9.5% payable monthly with the principal amount due on September 30, 2019. The agreement required monthly confirmation that all financial covenants under the Commitment Letter described in note 13(b) have been met. On June 27, 2019 the $10 million plus accrued interest was repaid in full. The Loan Agreement is no longer available to the Company.
|
|
|
On February 22, 2019, the Note Agreement was repaid in full using proceeds from the Credit Facilities described in note 13(b). The repayment consisted of $7.0 million in principal plus accumulated interest and an extension fee of $1.9 million. The Note Agreement is no longer available to the Company.
Current portion |
|
|
| — | ||
Long-term | 22,571 | — |
The Promissory Note matured on March 25, 2019 but was extended
Net investment in accordance withsubleases represent leased retail stores that have been subleased to certain franchise partners. These subleases are classified as a finance lease as the sublease terms are for the remaining term of the agreement. The balancehead lease.
15. | Intangible assets |
| Brands and trademarks |
| Patents |
| Customer relationships |
| Other |
| Total |
| |||||
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
| 8,386 |
|
| 13,551 |
|
| 19,578 |
|
| 3,778 |
|
| 45,293 |
|
Additions |
| 150 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 150 |
|
Disposition of Bridge Farm (note 6) |
| (3,066 | ) |
| 0 |
|
| (19,415 | ) |
| (3,747 | ) |
| (26,228 | ) |
Foreign currency translation |
| (25 | ) |
| 0 |
|
| (163 | ) |
| (31 | ) |
| (219 | ) |
Balance at December 31, 2020 |
| 5,445 |
|
| 13,551 |
|
| 0 |
|
| 0 |
|
| 18,996 |
|
Balance at December 31, 2021 |
| 5,445 |
|
| 13,551 |
|
| 0 |
|
| 0 |
|
| 18,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization and impairment |
| ||||||||||||||
Balance at December 31, 2019 |
| 131 |
|
| 0 |
|
| 976 |
|
| 191 |
|
| 1,298 |
|
Depreciation |
| 441 |
|
| 677 |
|
| 842 |
|
| 165 |
|
| 2,125 |
|
Impairment |
| 0 |
|
| 12,874 |
|
| 0 |
|
| 0 |
|
| 12,874 |
|
Disposition of Bridge Farm (note 6) |
| (190 | ) |
| 0 |
|
| (1,801 | ) |
| (353 | ) |
| (2,344 | ) |
Foreign currency translation |
| 0 |
|
| 0 |
|
| (17 | ) |
| (3 | ) |
| (20 | ) |
Balance at December 31, 2020 |
| 382 |
|
| 13,551 |
|
| 0 |
|
| 0 |
|
| 13,933 |
|
Depreciation |
| 354 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 354 |
|
Balance at December 31, 2021 |
| 736 |
|
| 13,551 |
|
| 0 |
|
| 0 |
|
| 14,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
| 5,063 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 5,063 |
|
Balance at December 31, 2021 |
| 4,709 |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 4,709 |
|
Brands and trademarks related to intellectual property purchased from Sun 8 Holdings Inc. with a useful life of $6.9 million outstanding included principal15 years and interest which accrued fromother intellectual property with a useful life of 12 years.
Patents consisted of intellectual property acquired through the dateacquisition of extension atPathway RX Inc. (“Pathway”) comprised of proprietary rights to certain technology, copyrights and trademarks with a rateuseful life of 1% per month and was repaid in full on June 5, 2019. The Promissory Note is no longer available20 years. During the year ended December 31, 2020, the Company determined that indicators of impairment existed regarding the Pathway intellectual property due to the Company.Company’s decision to reduce its focus on medical cannabis research. The estimated recoverable amount of the intangible assets was determined to be their fair value less costs of disposal and an impairment of $12.9 million was recorded to write down the assets to their recoverable amount of nil.
F-26
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Brands and trademarks related to intellectual property acquired as part of the Bridge Farm acquisition, customer relationships and other intangible assets consisting of non-compete clauses and energy credits were disposed of as part of the sale of Bridge Farm (note 6).
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Investments at amortized cost (A) |
| 24,987 |
|
| 0 |
|
Investment at FVTPL (B) |
| 48,576 |
|
| 51,876 |
|
|
| 73,563 |
|
| 51,876 |
|
|
|
|
|
|
|
|
Current portion |
| 3,065 |
|
| 0 |
|
Long-term |
| 70,498 |
|
| 51,876 |
|
A) | INvestments at amortized cost |
On February 16, 2021, the Company announced a $22 million strategic investment (the “Indiva Investment”) in Indiva Limited (“Indiva”). The Indiva Investment closed on February 23, 2021. The Indiva Investment was completed in the form of a brokered private placement of 25 million common shares of Indiva at a price of $0.44 per common share, for gross proceeds of $11 million, and a non-revolving secured term loan to Indiva in the principal amount of $11 million (the “Term Loan”). The Term Loan bore interest at a rate of 9% per annum and has a maturity date of February 23, 2024.
On October 4, 2021, the Company provided an additional $8.5 million principal loan to Indiva and has amended the Term Loan. The amended Term Loan has an interest rate of 15% per annum and the maturity date of February 23, 2024 has not changed. Accrued and unpaid interest of $0.3 million was added to the outstanding principal balance, bringing the total principal outstanding to $19.8 million.
The Term Loan has been designated as measured at amortized cost (note 32). The common shares are measured at Fair Value Through Profit or Loss (“FVTPL”) and are included in marketable securities (note 9).
On April 26, 2021, the Company closed a $3.0 million convertible debenture with a private company with a maturity date of October 26, 2021, and an interest rate of 9% per annum. The maturity date was extended to April 26, 2022, and the interest rate increased to 12% per annum. The Company has the right, but not the obligation, to convert all or any portion of the outstanding principal into common shares at a price equal to a conversion formula until the maturity date. The convertible debenture has been designated as measured at amortized cost (note 32).
The Company has entered into several promissory notes with Spiritleaf franchise partners, with interest rates ranging from prime plus a margin of 5.5% per annum to 8% per annum, with maturity dates of 5 years. The promissory notes have been designated as measured at amortized cost (note 32).
The following table summarizes the carrying amount of investments at amortized cost as at December 31, 2021:
As at | December 31, 2021 | |||
Secured term loan | 19,417 | |||
Convertible | 3,065 | |||
Spiritleaf franchise partners | 2,505 | |||
24,987 |
| B) |
| ||
|
| |||
|
|
| ||
|
|
| ||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
| ||
|
| Investment at fvtpl |
In May 2019, theThe Company closedowns a private placement of 8% senior unsecured convertible notes (“Senior Convertible Notes”special purpose vehicle (the “Zenabis Investment”) for gross proceeds of $92.6 million. In July 2019, an additional $0.6 million were issued. The Senior Convertible Notes bore interest at a rate of 8% per annum, compounded monthly. The Senior Convertible Notes and any accrued interest were repayable on the earlier of five years from date of issuance, the day the Company redeems the Senior Convertible Notes on certain conditions defined in the note agreement, or the day upon which the noteholder exercise their conversion rights as defined in the agreement. $0.1that owns $51.9 million of aggregate principal amount of senior secured debt of Zenabis Investments Ltd. (the “Zenabis Senior Loan”) of Zenabis Investments Ltd. (“Zenabis”). The Zenabis Senior Loan is secured by the senior convertible notes were issued to a directorassets of the Company.
Zenabis and its subsidiaries and is guaranteed by Zenabis Global Inc. On June 1, 2021, Zenabis was acquired by HEXO Corp. The Zenabis Senior Convertible Notes were hybrid instruments consisting of a financial liability and an embedded conversion feature. The embedded conversion feature met the definition of an embedded derivative which was separated from the host contract and accounted for separately as the economic characteristics and risks of the host contract and the embedded derivative were not closely related. The conversion feature did not contain a fixed conversion price and was only exercisable in the event of an initial public offering and at the second anniversary following the closing date. Prior to the initial public offering and the subsequent conversion, the embedded conversion feature was carried at FVTPL.
On August 14, 2019, Sundial received conversion notices from all holders of the 8% convertible notes. As a result, all principal and accrued interest was converted into 6.9 million common shares at a conversion price of $13.84 representing 80% of the initial public offering price converted to Canadian dollars.
|
|
| December 31, 2019 |
| December 31, 2018 |
| ||
Balance, beginning of year |
| 25,449 |
|
| — |
|
Convertible Notes issued - liability portion |
| — |
|
| 24,531 |
|
Unrealized foreign exchange gain |
| (209 | ) |
| — |
|
Accrued interest |
| (152 | ) |
| 152 |
|
Accretion |
| 2,443 |
|
| 594 |
|
Amortization of note issue costs |
| 745 |
|
| 172 |
|
Conversion to common shares |
| (18,139 | ) |
| — |
|
Conversion to warrants |
| (5,947 | ) |
| — |
|
Repayments |
| (4,190 | ) |
|
|
|
Balance, end of year |
| — |
|
| 25,449 |
|
In 2018, the Company closed three separate tranches of a private placement of 12% notes for gross proceeds of $28.9 million ($22.2 million from the CAD offering and $USD 5.0 from the USD offering), convertible into units consisting of 1.6 common shares and 0.8 of one common share purchase warrant at the option of the holder for up to twelve months. The Canadian dollar denominated offering was convertible into units at a price of $3.91 per unit. The U.S. dollar denominated offering was convertible into units at a price of $3.13 USD per unit. Interest was payable at 12% per annum, payable monthly, and maturing twelve months from the date of issuance. The convertible notes were segregated into their debt and equity components using the residual value approach, with $3.2 million being allocated to equity. $7 million of the convertible notes were issued to directors and officers.
During the year ended December 31, 2019, principal of $21.2 million convertible notes and USD$2.5 million convertible notes were converted into equity units, at the option of the holders. Equity units issued consisted of 6.2 million common shares and 3.6 million warrants. During the year ended December 31, 2019, principal of $1.0 million convertible notes and USD$2.4 million convertible notes were repaid to unit holders.Loan
F-27
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
bears interest at a rate of 14% per annum and has a maturity date of March 31, 2025. Pursuant to the terms of the Zenabis Senior Loan, Zenabis will also pay the Company a royalty based on quarterly sales revenue from its medical, recreational and wholesale cannabis lines net of value added or sales taxes. The royalty is payable for 32 fiscal quarters and is payable for quarters in which Zenabis accomplishes certain sales revenue targets.
The Company is in negotiations with Zenabis for the repayment and termination of the Zenabis Senior Loan as Zenabis is in breach of certain covenants. Zenabis filed a petition with the Supreme Court of British Columbia to determine the value of the royalty. The court dismissed the petition and did not decide the merits of the case. Zenabis had 30 days from December 17, 2021 to file a notice of appeal in respect of the court’s findings, but they did not do so.
The Zenabis Investment has been designated as FVTPL (note 32). As of April 27, 2022, all required payments have been made in respect of the Zenabis Senior Loan, including $100,000 per month in monitoring fees payable to the Company.
Due to the credit risk associated with Zenabis and its parent, and uncertainty of the completion of their proposed restructuring, the Company has adjusted the fair value of the Zenabis Senior Loan downward by $3.3 million in accordance with the requirements of IFRS. In the event that facts and circumstances change the fair value will be adjusted accordingly. The fair value determination does not attribute value to the associated royalty due to its inherent uncertainty, or monitoring fee.
17. | Equity-accounted investees |
As at | December 31, 2021 | December 31, 2020 | ||||
Interest in joint venture (A) | 412,858 | — | ||||
Interest in associate (B) | 0 | — | ||||
412,858 | — |
A) | Interest in joint venture |
On March 15, 2021, the Company and SAF Group announced they had entered into an agreement to form a 50/50 joint venture through a new corporation, SunStream Bancorp Inc. (“SunStream”). SunStream is a private company, incorporated under the Business Corporations Act (Alberta), which provides growth capital that pursues indirect investment and financial services opportunities in the global cannabis sector, as well as other investment opportunities.
SunStream is structured as a separate vehicle and the Company has a residual interest in the net assets of SunStream. Accordingly, the Company has classified its interest in SunStream as a joint venture, which is accounted for using the equity-method.
The current investment portfolio of SunStream is comprised of secured debt and hybrid debt and derivative instruments with United States based cannabis businesses. These investments are recorded at fair value each reporting period with any changes in fair value recorded through profit or loss. SunStream actively monitors these investments for changes in credit risk, market risks and other risks specific to each investment.
As at December 31, 2021, the Company had contributed $395.6 million out of the total $538.0 million that has been committed. Subsequent to December 31, 2021, the Company contributed $70.3 million to SunStream.
F-28
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The following table summarizes the carrying amount of the Company’s interest in the joint venture:
| Carrying amount | |||
Balance at December 31, 2020 | 0 | |||
Capital contributions | 395,569 | |||
Share of net earnings | 32,913 | |||
Share of other comprehensive income | 9,878 | |||
Distributions | (25,502 | ) | ||
Balance at December 31, 2021 | 412,858 |
SunStream is a related party due to it being classified as a joint venture of the Company. Capital contributions to the joint venture and distributions received from the joint venture are classified as related party transactions.
The following table summarizes the financial information of SunStream:
As at | December 31, 2021 | ||
Current assets (including cash and cash equivalents: $0.2 million) | 789 | ||
Non-current assets | 407,860 | ||
Current liabilities | (1,596 | ) | |
Non-current liabilities | 0 | ||
Net assets (liabilities) (100%) | 407,053 | ||
Year ended December 31, 2021 | |||
Revenue | 36,203 | ||
Profit from operations | 32,841 | ||
Other comprehensive income | 9,878 | ||
Total comprehensive income | 42,747 |
B) | Interest in associate |
On March 23, 2021, the Company’s equity interest in its subsidiary, Pathway, decreased from 50% to 25%, resulting in a loss of control. The Company decreased its equity interest in connection with amending the licence agreement that provides for use of Pathway’s intellectual property. Pathway is a private company focused on developing cannabis-based pharmaceutical drugs to treat symptoms associated with a wide range of medical conditions.
As a result of the loss of control, the Company has de-recognized the assets and liabilities of Pathway, and the non-controlling interest arising upon the acquisition of Pathway. A loss on loss of control of $1.9 million was recognized during the three months ended March 31, 2021. The fair value of the Company’s remaining investment in Pathway was determined to be nil as the Company had fully impaired the intangible asset, which consisted of intellectual property, during the year ended December 31, 2020 as described below, and there are 0 other assets that would give rise to a measured fair value amount attributable to the remaining 25% interest.
Adjustment to comparative information
During Q4 2020, and as disclosed in the annual consolidated financial statements of the Company as at and for the year ended December 31, 2020, the Company recognized an impairment of $12.9 million on the intangible assets held within Pathway. During the preparation of the Q1 2021 interim consolidated financial statements, the Company determined that the allocable amount of this impairment was not attributed to the non-controlling interest. The comparative December 31, 2020, consolidated statement of financial position has been recast to attribute 50% of the impairment of intangible assets recorded to the non-controlling interest as the related intangible assets related entirely to Pathway, the Company’s 50% owned subsidiary.
The recast of the consolidated statement of financial position as at December 2020 resulted in a reduction in non-controlling interest of $6.4 million from the previously reported amount of $4.4 million to the recast amount of negative $2.0 million, and a decrease in accumulated deficit of $6.4 million from the previously reported amount of
F-29
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
$564.5 million to the recast amount of $558.1 million and a decrease in loss per share attributable to the Company of $0.03 from the previously reported amount of $1.10 to the recast amount of $1.07.
This recast has no effect on the consolidated 2020 annual net loss or comprehensive loss or on any previously issued interim consolidated financial statements of the Company. The effect of this recast on the Company’s annual results for 2020 is a decrease to the presentation of the net loss attributable to the Company of $6.4 million from the previously reported amount of $206.0 million to the recast amount of $199.6 million, and an increase in the presentation of the net loss attributable to non-controlling interest of $6.4 million from the previously reported amount of $0.3 million to the recast amount of $6.7 million.
Contingent consideration
Contingent consideration was from the acquisition of Pathway in 2019. Contingent consideration valued at $2.3 million represents the granting of up to 280,000 warrants to purchase common shares of the Company at an exercise price of $1.81 per share, subject to the achievement of certain gross revenue milestones derived from Pathway royalty activities.
18. | Accounts payable and accrued liabilities |
| December 31, 2019 |
| December 31, 2018 |
| ||
| 214 |
|
| 141 |
| |
Adoption of IFRS 16 |
| 1,119 |
|
| — |
|
Acquisitions (note 5a) |
| 15,179 |
|
| — |
|
Liabilities incurred |
| 674 |
|
| 107 |
|
Lease payments |
| (778 | ) |
| (34 | ) |
Liabilities disposed of |
| (468 | ) |
| — |
|
Interest expense |
| 444 |
|
| — |
|
Foreign currency translation |
| 565 |
|
| — |
|
Balance, end of year |
| 16,949 |
|
| 214 |
|
|
|
|
|
|
|
|
Current portion |
| 722 |
|
| 44 |
|
Long-term |
| 16,227 |
|
| 170 |
|
| December 31, 2021 |
| December 31, 2020 |
| ||
Trade payables |
| 4,172 |
|
| 4,849 |
|
Accrued and other liabilities |
| 34,280 |
|
| 18,459 |
|
|
| 38,452 |
|
| 23,308 |
|
On adoption
19. | Derivative warrants |
| December 31, 2021 |
| December 31, 2020 |
| ||
Balance, beginning of year |
| 428 |
|
| 0 |
|
2021 Series A and B Warrants - fair value on issuance (A) |
| 62,680 |
|
| 0 |
|
2021 Additional Series A and B Warrants - fair value on issuance (B) |
| 38,576 |
|
| 0 |
|
New Warrants - fair value on issuance recognized in profit or loss (C) |
| 106,531 |
|
| 0 |
|
Agent Warrants - fair value on issuance (D) |
| 0 |
|
| 504 |
|
Secured Convertible Note Warrants - fair value on issuance (E) |
| 0 |
|
| 6,683 |
|
Unsecured Convertible Notes Warrants - fair value on issuance (F) |
| 0 |
|
| 3,961 |
|
2020 Series A and B Warrants - fair value on issuance (G) |
| 0 |
|
| 11,784 |
|
Change in fair value recognized in profit or loss |
| (28,697 | ) |
| 12,995 |
|
Converted to common shares |
| (157,818 | ) |
| (35,521 | ) |
Unrealized foreign exchange loss |
| 0 |
|
| 22 |
|
Balance, end of year |
| 21,700 |
|
| 428 |
|
The carrying amount is an estimate of IFRS 16, the Company recognized lease liabilities of $1.1 million in relation to corporate office space and equipment at the presentfair value of the derivative warrants and is presented as a current liability. The derivative warrants are classified as a liability due to the Company’s share price being denominated in USD, which creates variability as to the value in CAD when they are exercised. The derivative warrants are recorded as a current liability, however, the Company has no cash obligation nor is there any cash loss with respect to the derivative warrants, rather it will deliver common shares if and when warrants are exercised.
(a) | 2021 Series A and B Warrants |
On February 2, 2021, the Company issued 100.0 million series A units (the “Series A Units”), each consisting of one common share and one-half series A warrant (collectively, the “2021 Series A Warrants”) to purchase one common share and 33.3 million series B units (the “Series B Units”), each consisting of one pre-funded series B warrant (the “2021 Series B Warrants”) to purchase one common share and one-half 2021 Series A Warrant to purchase one common share (collectively, the “January 2021 Units Offering”). Each Series A Unit was sold at a price of US$0.75 per unit and each Series B Unit was sold at a price of US$0.75 per unit, less US$0.0001 per unit. Gross proceeds from this offering were US$100.0 million. The 2021 Series A Warrants and 2021 Series B Warrants were exercisable immediately and had a term of five years commencing on the date of issuance. The exercise price of the 2021 Series A Warrants was US$0.80 per common share and the exercise price of the 2021 Series B Warrants was US$0.0001 per common share.
F-30
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
On February 2, 2021, the entire 33.3 million 2021 Series B Warrants were exercised resulting in the issuance of 33.3 million common shares.
On February 10, 2021, 3.3 million 2021 Series A Warrants were exercised at a weighted average exercise price of US$0.80 per warrant resulting in the issuance of 3.3 million common shares and gross proceeds to the Company of US$2.7 million.
On February 22, 2021, the remaining lease payments63.3 million 2021 Series A Warrants were exercised at a weighted average exercise price of US$0.80 per warrant resulting in the issuance of 63.3 million common shares and gross proceeds to the Company of US$50.7 million. In connection with this exercise, the New Warrants were granted (refer to C below).
(b) | 2021 Additional series A and B warrants |
On February 4, 2021, the Company issued 60.5 million additional series A units (the “Additional Series A Units”), each consisting of one common share and one-half additional series A warrant (collectively, the “2021 Additional Series A Warrants”) to purchase one common share and 14.0 million additional series B units (the “Additional Series B Units”), each consisting of one pre-funded additional series B warrant (the “2021 Additional Series B Warrants”) to purchase one common share and one-half 2021 Additional Series A Warrant to purchase one common share, (collectively, the “February 2021 Units Offering”). Each Additional Series A Unit was sold at a price of US$1.00 per unit and each Additional Series B Unit was sold at a price of US$1.00 per unit, less US$0.0001 per unit. Gross proceeds from this offering were US$74.5 million. The 2021 Additional Series A Warrants and 2021 Additional Series B Warrants were exercisable immediately and had a term of five years commencing on the date of issuance. The exercise price of the 2021 Additional Series A Warrants was US$1.10 per common share and the exercise price of the 2021 Additional Series B Warrants was US$0.0001 per common share.
On February 4, 2021, the entire 14.0 million 2021 Additional Series B Warrants were exercised resulting in the issuance of 14.0 million common shares.
On February 10, 2021, 2.3 million 2021 Additional Series A Warrants were exercised at a weighted average exercise price of US$1.10 per warrant resulting in the issuance of 2.3 million common shares and gross proceeds to the Company of US$2.5 million.
On February 22, 2021, the remaining 35.0 million 2021 Additional Series A Warrants were exercised at a weighted average exercise price of US$1.10 per warrant resulting in the issuance of 35.0 million common shares and gross proceeds to the Company of US$38.5 million. In connection with this exercise, the New Warrants were granted (refer to C below).
(c) | new warrants |
On February 22, 2021, (i) the remaining 63.3 million 2021 Series A Warrants were exercised at a weighted average exercise price of US$0.80 per warrant resulting in the issuance of 63.3 million common shares and gross proceeds to the Company of US$50.7 million and (ii) the remaining 35.0 million 2021 Additional Series A Warrants were exercised at a weighted average exercise price of US$1.10 per warrant resulting in the issuance of 35.0 million common shares and gross proceeds to the Company of US$38.5 million. In connection with this exercise, the Company issued 98.3 million new warrants to the holders of the 2021 Series A Warrants and 2021 Additional Series A Warrants (the “New Warrants”), each entitling the holder to purchase 1 common share at an exercise price of US$1.50, subject to customary anti-dilution adjustments. The Company has granted the holders the right to have the common shares issuable upon exercise of the New Warrants registered pursuant to a registration statement filed with the SEC. Such
F-31
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
registration statement was filed with the SEC on March 3, 2021. The New Warrants are immediately exercisable and have a term of 42 months from March 18, 2021, which is the effective date of the registration statement. As at December 31, 2021, 98.3 million New Warrants remained outstanding.
(d) | Agent warrants |
In connection with the debt restructuring transactions during the prior year, the Company issued common share purchase warrants to the placement agents to acquire up to 1.08 million common shares at an initial exercise price of US$1.00 per common share (the “Agent Warrants”).
During the year ended December 31, 2021, the entire 1.08 million Agent Warrants were exercised. 540,000 Agent Warrants were exercised at a weighted average exercise price of US$1.00 per warrant resulting in the issuance of 356,949 common shares. There were 0 gross proceeds to the Company as the exercise was conducted on a cashless basis. The other 540,000 Agent Warrants were exercised at a weighted average exercise price of US$1.00 per warrant resulting in the issuance of 540,000 common shares and gross proceeds to the Company of US$0.5 million.
(e) | Secured convertible note warrants |
In connection with the debt restructuring transactions during the prior year, the Company issued common share purchase warrants to acquire up to 17.5 million common shares at an initial exercise price of US$1.00 per warrant and common share purchase warrants to acquire up to 17.5 million common shares at an initial exercise price of US$1.20 per warrant (the “Secured Convertible Note Warrants”). The Secured Convertible Note Warrants were issued on June 5, 2020 and expired 36 months from the date of issuance.
During the period October 22, 2020, to December 31, 2020, the entire 35.0 million Secured Convertible Note Warrants were exercised at a weighted average exercise price of US$0.1766 per warrant resulting in the issuance of 35.0 million common shares and gross proceeds to the Company of $8.0 million.
(f) | Unsecured convertible notes warrants |
In connection with the debt restructuring transactions during the prior year, the Company issued common share purchase warrants to acquire up to 14.5 million common shares at an initial exercise price of US$0.9338 per common share (the “Unsecured Convertible Notes Warrants”). The Unsecured Convertible Notes Warrants were issued on June 5, 2020, were immediately exercisable, and expire 42 months from the date that the underlying common shares become freely tradeable, which was July 16, 2020. In certain circumstances, the Unsecured Convertible Notes Warrants are subject to forced exercise provisions whereby the Company can force exercise should the volume weighted average price of the Company’s common shares exceed US$2.8014.
As a result of sales under the ATM Program, the exercise price of the Unsecured Convertible Notes Warrants was adjusted to US$0.1766 per common share. The foregoing exercise price may be further adjusted as the result of future sales under the ATM Program or other offerings, if any.
During the period July 16, 2020, to December 31, 2020, 14.0 million Unsecured Convertible Notes Warrants were exercised at a weighted average exercise price of US$0.1766 per warrant resulting in the issuance of 14.0 million common shares and gross proceeds to the Company of $3.2 million. As at December 31, 2021, 0.5 million Unsecured Convertible Notes Warrants remained outstanding.
(g) | 2020 Series A and B warrants |
On August 18, 2020, in connection with the August 2020 registered offering, the Company issued 40.1 million series A warrants (“2020 Series A Warrants”) and 14.3 million series B warrants (“2020 Series B Warrants”). The 2020 Series A Warrants and 2020 Series B Warrants are exercisable immediately and have a term of five years commencing on the date of issuance. The exercise price of the 2020 Series A Warrants are US$0.75 per common share and the exercise price of the 2020 Series B Warrants are US$0.0001 per common share.
On August 19, 2020, 9.2 million 2020 Series B Warrants were converted into common shares and on August 20, 2020, the remaining 5.1 million 2020 Series B Warrants were converted into common shares.
F-32
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
As a result of sales under the At-the-Market (“ATM”) Program, the exercise price of the 2020 Series A Warrants was adjusted to US$0.1766 per common share. The exercise price of the 2020 Series A Warrants may be further adjusted as the result of future sales under the ATM Program or other offerings, if any.
During the period August 18, 2020, to December 31, 2020, 39.6 million 2020 Series A Warrants were exercised at a weighted average exercise price of US$0.1766 per warrant resulting in the issuance of 39.6 million common shares and gross proceeds to the Company of $9.1 million. As at December 31, 2021, 0.5 million 2020 Series A Warrants remained outstanding.
The following table summarizes outstanding derivative warrants as at January 1, 2019, and discounted using the Company’s incremental borrowing rate of 5.95% for assets over a similar term with similar security, determined in accordance with IFRS 16. The associated right-of-use assets were measured at the amount equal to the lease liabilities on January 1, 2019.December 31, 2021:
| Exercise price (USD) |
| Number of warrants |
| Weighted average contractual life |
| |||
2020 Series A Warrants (1) |
| 0.1766 |
|
| 500,000 |
|
| 3.6 |
|
Unsecured Convertible Notes Warrants (1) |
| 0.1766 |
|
| 500,000 |
|
| 2.0 |
|
New Warrants |
| 1.50 |
|
| 98,333,334 |
|
| 2.6 |
|
|
|
|
|
| 99,333,334 |
|
| 2.6 |
|
(1) | The conversion or exercise price, as applicable, is subject to full ratchet antidilution protection upon any subsequent transaction at a price lower than the price then in effect and standard adjustments in the event of any share split, share dividend, share combination, recapitalization or other similar transaction. If the Company issues, sells or enters into any agreement to issue or sell, any variable rate securities, the investors have the additional right to substitute the variable price (or formula) of such securities for the conversion or exercise price, as applicable. |
20. | Lease obligations |
| December 31, 2021 |
| December 31, 2020 |
| ||
Balance, beginning of year |
| 1,440 |
|
| 16,949 |
|
Acquisition (note 5) |
| 29,481 |
|
| — |
|
Liabilities incurred |
| 4,514 |
|
| 763 |
|
Lease payments |
| (2,721 | ) |
| (937 | ) |
Dispositions |
| (20 | ) |
| (735 | ) |
Interest expense |
| 776 |
|
| 416 |
|
Disposition of Bridge Farm (note 6) |
| 0 |
|
| (14,894 | ) |
Foreign currency translation |
| 0 |
|
| (122 | ) |
Balance, end of year |
| 33,470 |
|
| 1,440 |
|
|
|
|
|
|
|
|
Current portion |
| 5,701 |
|
| 409 |
|
Long-term |
| 27,769 |
|
| 1,031 |
|
The Company’s minimum lease payments are as follows:
|
| December 31, |
| |
Less than one year |
|
|
|
|
One to three years |
|
|
|
|
Three to five years |
|
|
|
|
Thereafter |
|
|
|
|
Minimum lease payments |
|
|
|
|
Amounts representing finance charges |
|
| ( | ) |
Net minimum lease payments |
|
|
|
|
The Company has short-term leases with lease terms of 12 months or less as well as low-value leases. As these costs are incurred, they are recognized as general and administrative expense. These costs were immaterial in 2019.
|
|
On January 15, 2018, the Company entered into the Investment and Royalty Agreement with a company controlled by the former Executive Chairman of the Company (the “Purchaser”). The Investment and Royalty Agreement was amended on August 16, 2018. Under the amended agreement, the Purchaser agreed to provide up to $11.0 million of equity financing for the construction of a portion of the Company’s facility in Olds, Alberta. As at December 31, 2018, a total of $10.9 million had been advanced under the amended agreement and was converted into 7,149,035 common shares. The difference between the estimated fair value of the shares at the time of issue and the amount based on the price per share as outlined in the credit agreement of $8.5 million was charged to finance expense in 2018. The Investment and Royalty Agreement was subject to various non-financial covenants, with which the Company was in compliance as a December 31, 2018, except for the growing capacity covenant. This covenant required that at least 25,000 square feet of defined space at the Olds facility be dedicated exclusively to and capable of producing flower. This covenant was waived by the Purchaser for the period from August 16, 2018 to October 1, 2019, as the use of that facility space for clones and vegetation plants was determined to be a superior allocation of productive capacity.2021.
In addition, pursuant to the terms of the Investment and Royalty Agreement, the Purchaser was entitled to quarterly royalty payments calculated based on the Company’s revenue from the facilities subject to the amended agreement for each fiscal quarter multiplied by 6.5% (the “Royalty Payment”). The Royalty Payments accrued beginning October 1, 2019 and were to be paid on the first business day of every subsequent fiscal quarter until September 30, 2028. The Company had estimated the present value of these payments at December 31, 2018 to be $18.5 million assuming a discount rate of 18%.
F-28F-33
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company used a discounted cash flow methodology to estimate the value the royalty component of the financial obligation. The material assumptions used by the Company to estimate the valuation for the royalty and held constant for the 10-year term of the royalty payments, and assuming a discount rate of 18%, were as follows:
21. | Other liabilities |
December 31, 2021 | December 31, 2020 | |||||
Financial guarantee liability (A) | 466 | — | ||||
DSU liability (B) | 4,039 | — | ||||
|
|
| ||||
|
|
|
| |||
|
|
| ||||
|
|
| ||||
|
|
|
|
(A) | Financial guarantee liability |
On July 17, 2019,For franchise operated locations where the Company issued 50,963 sharesprovided an indemnity for its franchisees, lease payments are made directly to the Company’s former Executive Chairman in consideration for advancinglandlord by the remaining funds availablefranchisee, and the obligation to be advancedmake lease payments would only revert to the Company if a franchisee defaulted on their obligations under the terms of the sub-lease or lease. The Company has made an estimate of expected credit losses in the event of default by the franchisees in making lease payments. This amount is recognized as a financial obligation. In addition,guarantee liability in the consolidated statement of financial position, and changes in the estimated liability are recognized as a financial guarantee liability expense within finance costs in the consolidated statement of loss and comprehensive loss.
(B) | DSU liability |
DSUs are granted to directors and generally vest in equal instalments over one year. The Company intended to settle the DSUs by issuing common shares, however, during the year ended December 31, 2021, the Company agreedchanged its intention to indirectly acquiresettle the Investment and Royalty Agreement pursuantDSUs to making a purchase agreement wherebycash payment to the Company would purchase allholder equal to the fair value of the outstanding shares of the Purchaser from the Company’s former Executive Chairman for aggregate consideration of 3,680,000 common shares 480,000 share purchase warrants (each exercisable for one common sharecalculated at an exercise price of $15.94 for a period of three years from the date of issue)such payment. Accordingly, $5.1 million representing the previously recognized fair value of the DSUs, was reclassified from contributed surplus to other liabilities.
DSUs are accounted for as a liability instrument and a cash payment of $9.5 million. Upon completionmeasured at fair value based on the market value of the Company’s initial public offering, the Purchaser was acquired on August 6, 2019 resulting in a loss on financial obligation of $59.6 million based on the initial public offering price of $US13.00. The cash payment of $9.5 million under the purchase agreement was paid prior to September 30, 2019.common shares at each period end.
| Income taxes |
The following table reconciles the expected income tax expense (recovery) at the Canadian federal and provincial statutory income tax rates to the amounts recognized in the consolidated statementsstatement of loss and comprehensive loss for the yearyears ended December 31, 2019 and ten months ended2021, December 31, 2018:2020 and December 31, 2019:
| December 31, 2019 |
| December 31, 2018 |
| February 28, 2018 |
| December 31, 2021 |
| December 31, 2020 |
| December 31, 2019 |
| ||||||
Loss before taxes |
| (276,255 | ) |
| (56,526 | ) |
| (12,995 | ) |
| (232,453 | ) |
| (206,317 | ) |
| (146,307 | ) |
Statutory income tax rates |
| 26.5 | % |
| 27 | % |
| 27 | % |
| 23.0 | % |
| 24.0 | % |
| 26.5 | % |
Expected income tax recovery |
| (73,208 | ) |
| (15,262 | ) |
| (3,509 | ) |
| (53,464 | ) |
| (49,516 | ) |
| (38,771 | ) |
Non-deductible goodwill impairment |
| 26,581 |
|
| — |
| — |
| ||||||||||
Non-deductible share-based compensation |
| 10,474 |
|
| 1,860 |
| 1,236 |
|
| 2,308 |
|
| 1,970 |
| 10,474 |
| ||
Non-deductible finance expense |
| 15,981 |
|
| 2,304 |
| — |
|
| 2 |
|
| 2,130 |
| 15,981 |
| ||
Revaluation of the fair value of warrant liabilities |
| 17,902 |
|
| 0 |
| 0 |
| ||||||||||
Non-deductible portion of capital losses |
| 5,118 |
|
| 0 |
| 0 |
| ||||||||||
Other non-deductible expenses |
| 4,101 |
|
| — |
| — |
|
| 610 |
|
| 348 |
| 2,621 |
| ||
Change in tax rates |
| 3,988 |
|
| — |
| — |
|
| 0 |
|
| 1,528 |
| 3,305 |
| ||
Deferred tax benefits not recognized |
| 7,457 |
|
| 11,098 |
| 2,273 |
|
| 25,253 |
|
| 43,540 |
| 2,781 |
| ||
Income tax (recovery) expense |
| (4,626 | ) |
| — |
| — |
|
| (2,271 | ) |
| 0 |
| (3,609 | ) |
Details of the deferred tax assets (liabilities) are as follows:
| December 31, 2019 |
| December 31, 2018 |
| ||
|
|
|
|
|
| |
Property, plant and equipment |
| (3,490 | ) |
| — |
|
Inventory |
| 1,881 |
|
| (333 | ) |
Biological assets |
| (7,170 | ) |
| (236 | ) |
Intangible assets |
| (7,355 | ) |
| — |
|
Non-capital losses |
| 12,769 |
|
| 569 |
|
Net deferred tax asset (liability) |
| (3,365 | ) |
| — |
|
F-29F-34
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Details of the deferred tax assets (liabilities) are as follows:
| December 31, 2021 |
| December 31, 2020 |
| ||
Deferred tax assets (liabilities): |
|
|
|
|
|
|
Inventory |
| 20,472 |
|
| 8,388 |
|
Biological assets |
| (9,509 | ) |
| (8,388 | ) |
Net investment in subleases |
| (6,109 | ) |
| 0 |
|
Lease obligations |
| (8,371 | ) |
| 0 |
|
Marketable securities |
| 7,442 |
|
| 0 |
|
Equity-accounted investee |
| (3,925 | ) |
| 0 |
|
Net deferred tax asset (liability) |
| 0 |
|
| 0 |
|
Deferred tax assets have not been recognized for the following deductible temporary differences:
| December 31, 2019 |
| December 31, 2018 |
| December 31, 2021 |
| December 31, 2020 |
| ||||
Unrecognized deductible temporary differences: |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
| — |
|
| 896 |
|
| 84,322 |
|
| 36,782 |
|
Intangible assets |
| — |
|
| 4,520 |
|
| 183 |
|
| 536 |
|
Share issue costs |
| 16,779 |
|
| 1,880 |
|
| 23,835 |
|
| 11,112 |
|
Investments |
| 3,300 |
|
| 0 |
| ||||||
Lease obligations |
| 69,865 |
|
| 0 |
| ||||||
Financial obligations and other |
| 1,726 |
|
| 18,699 |
|
| 4,100 |
|
| 1,054 |
|
Convertible notes |
| — |
|
| 594 |
| ||||||
Non-capital losses |
| 54,472 |
|
| 30,074 |
| ||||||
Inventory and biological assets |
| 0 |
|
| 34,781 |
| ||||||
Non-capital losses & SR&ED |
| 219,165 |
|
| 171,205 |
| ||||||
Unrecognized deductible temporary differences |
| 72,977 |
|
| 56,663 |
|
| 404,770 |
|
| 255,470 |
|
The movement in deferred income tax liability during the year is as follows:
| ||||
|
| |||
|
| |||
|
| |||
|
|
| ||
|
| |||
|
|
| December 31, 2021 |
| December 31, 2020 |
| ||
Balance, beginning of year |
| 0 |
|
| 3,365 |
|
Acquisition of Inner Spirit |
| 0 |
|
| 0 |
|
Recognized in profit and loss |
| (2,271 | ) |
| 0 |
|
Recognized in other comprehensive income |
| 2,271 |
|
| (25 | ) |
Recognized in discontinued operations (note 6) |
| 0 |
|
| (225 | ) |
Disposition of Bridge Farm (note 6) |
| 0 |
|
| (3,115 | ) |
Balance, end of year |
| 0 |
|
| 0 |
|
The Company has $99.1$218.5 million (December 31, 20182020 - $32.2$171.2 million) of non-capital losses available for future periods that will expire prior to 2038-2039. The Company has £8.12037-2041. There are $60.0 million of non-capitaluncertain losses available for future periods that dohave not expire.been recognized.
| Share capital and warrants |
| (a) | Authorized |
The authorized capital of the Company consists of an unlimited number of voting common shares and preferred shares with no par value.
On July 12, 2019, the Company approved a 1.6 to 1 share split of the Company’s issued and outstanding common shares (the “Share Split”). Each shareholder of record of the Company as of the close of business on the record date on July 22, 2019 received 1.6 common shares for each share held on such date. All references to common shares, warrants, simple warrants and performance warrants have been retrospectively adjusted to reflect the Share Split.
|
|
|
| December 31, 2019 |
| December 31, 2018 |
| ||||||||
| Note | Number of Shares |
| Carrying Amount |
| Number of Shares |
| Carrying Amount |
| ||||
Balance, beginning of year |
|
| 68,648,984 |
|
| 65,133 |
|
| 62,204,846 |
|
| 25,769 |
|
Initial public offering |
|
| 11,000,000 |
|
| 189,518 |
|
| — |
|
| — |
|
Shares issued for assets | 5,28 |
| 797,952 |
|
| 6,537 |
|
| — |
|
| — |
|
Other shares issuances |
|
| 394,926 |
|
| 2,323 |
|
| 7,040,714 |
|
| 17,344 |
|
Shares issued to related parties | 27 |
| 3,730,963 |
|
| 63,460 |
|
| 5,549,037 |
|
| 16,474 |
|
Share issuance costs |
|
| — |
|
| (12,770 | ) |
| — |
|
| (310 | ) |
Business acquisitions | 5 |
| 2,696,800 |
|
| 39,849 |
|
| — |
|
| — |
|
Convertible debt - conversions | 14,15 |
| 13,108,676 |
|
| 113,526 |
|
| — |
|
| — |
|
Warrants exercised | 19(c) |
| 4,551,082 |
|
| 21,882 |
|
| 558,501 |
|
| 2,182 |
|
Shares issued for services | 20 |
| 164,080 |
|
| 2,320 |
|
| 236,277 |
|
| 521 |
|
RSUs exercised | 20(c) |
| 57,960 |
|
| 195 |
|
| — |
|
| — |
|
Employee warrants exercised | 20 |
| 2,029,000 |
|
| 17,681 |
|
| 2,875,310 |
|
| 3,980 |
|
Shares repurchased | 27 |
| — |
|
| — |
|
| (9,815,701 | ) |
| (827 | ) |
Balance, end of year |
|
| 107,180,423 |
|
| 509,654 |
|
| 68,648,984 |
|
| 65,133 |
|
F-30F-35
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
(b) | Issued and outstanding |
|
| December 31, 2021 |
| December 31, 2020 |
| ||||||||
| Note | Number of Shares |
| Carrying Amount |
| Number of Shares |
| Carrying Amount |
| ||||
Balance, beginning of year |
|
| 918,844,133 |
|
| 762,046 |
|
| 107,180,423 |
|
| 509,654 |
|
Share issuances |
|
| 956,806,648 |
|
| 977,425 |
|
| 337,696,867 |
|
| 176,931 |
|
Share issuance costs |
|
| 0 |
|
| (16,371 | ) |
| 0 |
|
| (5,593 | ) |
Acquisition | 5 |
| 24,431,278 |
|
| 26,216 |
|
| 0 |
|
| 0 |
|
Convertible debenture settlement | 5 |
| 2,488,754 |
|
| 2,671 |
|
| 373,371,318 |
|
| 63,002 |
|
Disposition of Bridge Farm | 6 |
| 0 |
|
| 0 |
|
| (2,716,271 | ) |
| (38,447 | ) |
Derivative warrants exercised | 19 |
| 152,146,950 |
|
| 277,136 |
|
| 102,836,429 |
|
| 55,912 |
|
Warrants exercised | 23(c) |
| 195,711 |
|
| 178 |
|
| 0 |
|
| 0 |
|
Employee awards exercised (1) | 24(c) |
| 5,494,883 |
|
| 6,403 |
|
| 475,367 |
|
| 587 |
|
Balance, end of year |
|
| 2,060,408,357 |
|
| 2,035,704 |
|
| 918,844,133 |
|
| 762,046 |
|
(1) | Included in employee awards exercised are 875,000 RSUs that vested and were exercised in December 2020; however, the common shares were not issued until January 2021. Excluded from employee awards exercised are 500,000 RSUs that vested and were exercised in December 2021; however, the common shares were not issued until January 2022. |
On August 6, 2019,ATM Offering Program
During the year ended December 31, 2021, the Company closed its initial public offering of 11issued 796.3 million common shares at a weighted average exercise price of US$13.00 per0.8597 for gross proceeds of $855.2 million (US$684.6 million) through its ATM programs.
2021 Registered Offerings
In connection with the January 2021 Units Offering, the Company issued 100.0 million common shares (note 19a) and in connection with the February 2021 Units Offering, the Company issued 60.5 million common shares (note 19b). Total proceeds from the two offerings allocated to share (Canadian equivalent of $17.23). Gross proceeds amounted to $189.5capital were $122.2 million.
| (c) | Common share purchase warrants |
| Number of Warrants |
| Carrying Amount |
| ||
Balance at February 28, 2018 |
| — |
|
| — |
|
Fair value assigned to common share purchase warrants |
| 4,211,904 |
|
| 3,108 |
|
Balance at December 31, 2018 |
| 4,211,904 |
|
| 3,108 |
|
40% Warrants reclassified from derivative liability (i) (note 13c) |
| 957,225 |
|
| 4,122 |
|
60% Warrants reclassified from derivative liability (i) (note 13c) |
| 1,495,665 |
|
| 11,969 |
|
Warrants issued to related parties (ii) |
| 480,000 |
|
| 5,833 |
|
Warrants issued on conversion of convertible notes (iii) |
| 3,572,274 |
|
| 6,731 |
|
Warrants exercised |
| (4,551,082 | ) |
| (3,931 | ) |
Warrants expired |
| (662 | ) |
| (1 | ) |
Balance at December 31, 2019 |
| 6,165,324 |
|
| 27,831 |
|
|
|
|
|
|
|
| Number of Warrants |
| Carrying Amount |
| ||
Balance at December 31, 2019 |
| 6,165,324 |
|
| 27,831 |
|
Warrants issued |
| 544,000 |
|
| 306 |
|
Warrants expired |
| (3,232,434 | ) |
| (5,908 | ) |
Warrants cancelled |
| (2,452,890 | ) |
| (16,091 | ) |
Balance at December 31, 2020 |
| 1,024,000 |
|
| 6,138 |
|
Acquisition (note 5) |
| 2,097,828 |
|
| 1,771 |
|
Warrants issued |
| 640,000 |
|
| 361 |
|
Warrants exercised |
| (195,711 | ) |
| (178 | ) |
Balance at December 31, 2021 |
| 3,566,117 |
|
| 8,092 |
|
During the year ended December 31, 2019, a total2021, the Company issued 640,000 warrants to Sun 8 Holdings Inc. (“Sun 8”) with an exercise price of 4,551,082$0.94 per unit, in conjunction with achieving minimum thresholds of revenue derived from the brands or cultivars that the Company acquired from Sun 8 during the year ended December 31, 2019.
During the year ended December 31, 2021, 195,711 warrants that formed part of the contingent consideration from the Inner Spirit Transaction, were exercised consistingresulting in a net payment of 4,211,242 warrants exercised at a price of $3.91 for gross proceeds of $16.5$0.2 million 307,840 exercised for gross proceeds of $1.3 million ofrepresenting the warrants issued upon conversion ofdifference between the CAD denominated convertible notesexercise prices and 32,000 warrants exercised for gross proceeds of USD$120 thousand of the warrants issued upon conversion of the USD denominated convertible notes. 662 warrants expired unexercised in April 2019.cash consideration (note 5). The carrying value of the exercised warrants of $3.9 million was adjusted from warrants to share capital.
F-36
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The following table summarizes outstanding warrants as at December 31, 2019:2021:
| Warrants outstanding and exercisable |
| |||||||
Issued in relation to | Weighted average exercise price |
| Number of warrants |
| Weighted average contractual life (years) |
| |||
Convertible notes (USD) | USD 3.75 |
|
| 444,888 |
|
| 0.8 |
| |
Convertible notes (CAD) |
| 4.38 |
|
| 2,787,546 |
|
| 0.7 |
|
Acquisition of financial obligation |
| 15.94 |
|
| 480,000 |
|
| 2.5 |
|
Term debt financing (60%) |
| 20.76 |
|
| 1,495,665 |
|
| 2.6 |
|
Term debt financing (40%) |
| 21.63 |
|
| 957,225 |
|
| 2.6 |
|
|
| 11.97 |
|
| 6,165,324 |
|
| 1.6 |
|
| Warrants outstanding and exercisable |
| |||||||
Issued in relation to | Weighted average exercise price |
| Number of warrants |
| Weighted average contractual remaining life (years) |
| |||
Acquisition of financial obligation |
| 15.94 |
|
| 480,000 |
|
| 0.5 |
|
Financial services |
| 4.60 |
|
| 544,000 |
|
| 7.6 |
|
Acquired from Inner Spirit (1) |
| 0.34 |
|
| 1,902,117 |
|
| 2.2 |
|
Sun 8 |
| 0.94 |
|
| 640,000 |
|
| 4.0 |
|
|
| 3.20 |
|
| 3,566,117 |
|
| 3.1 |
|
|
|
|
| Year ended December 31 |
| Ten months ended December 31 |
| ||
| 2019 |
| 2018 |
| ||
Balance, beginning of year |
| 9,493 |
|
| 4,551 |
|
Share-based compensation |
| 37,009 |
|
| 6,889 |
|
Warrants forfeited |
| — |
|
| (82 | ) |
Warrants exercised |
| (16,310 | ) |
| (1,865 | ) |
Balance, end of year |
| 30,192 |
|
| 9,493 |
|
| Share-based compensation |
The Company has a number of equity-settled share-based compensation plans which include simple and performance warrants, stock options, restricted share units (“RSUs”)RSUs and deferred share units (“DSUs”).DSUs. Further detail on each of these plans is outlined below. Subsequent to the Company’s initial public offering, the Company established the stock option, RSU and DSU plans to replace the granting of simple warrants and performance warrants.
F-31
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The components of share-based compensation expense are as follows:
| Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| |||
2019 |
| 2018 |
| 2018 |
| ||||
Simple warrants (a) |
| 24,741 |
|
| 5,029 |
|
| 1,086 |
|
Performance warrants (a) |
| 11,023 |
|
| 1,860 |
|
| 3,465 |
|
Stock options (b) |
| 101 |
|
| — |
|
| — |
|
Restricted share units (c) |
| 220 |
|
| — |
|
| — |
|
Deferred share units (c) |
| 1,119 |
|
| — |
|
| — |
|
Shares issued for services |
| 2,320 |
|
| 521 |
|
| 25 |
|
|
| 39,524 |
|
| 7,410 |
|
| 4,576 |
|
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Equity-settled expense |
|
|
|
|
|
|
|
|
|
Simple warrants (A) |
| 2,899 |
|
| 1,539 |
|
| 23,918 |
|
Performance warrants (A) |
| 361 |
|
| (42 | ) |
| 11,023 |
|
Stock options (B) |
| (14 | ) |
| 651 |
|
| 98 |
|
Restricted share units (C) |
| 6,789 |
|
| 4,069 |
|
| 220 |
|
Shares issued for services |
| — |
|
| — |
|
| 2,320 |
|
Cash-settled expense |
|
|
|
|
|
|
|
|
|
Deferred share units (i) (D) |
| 2,272 |
|
| 2,349 |
|
| 1,119 |
|
|
| 12,307 |
|
| 8,566 |
|
| 38,698 |
|
(i) | Cash-settled DSUs are accounted for as a liability and are measured at fair value based on the market value of the Company’s common shares at each period end. Fluctuations in the fair value are recognized during the period in which they occur. |
In determining the amount of share-based compensation, the Company used the Black-Scholes option pricing model to estimate the fair value of units granted during the yearyears ended December 31, 2019 and ten months ended2021, December 31, 20182020 and December 31, 2019 through the application of the following assumptions:
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 | December 31, 2020 | December 31, 2019 |
Risk-free interest rate | 0.45% | 0.28% - 0.29% | 1.41% - 1.88% |
Expected life of units (years) | 5 | 10 | 2 - 10 |
Expected annualized volatility | 168% | 143% | 97% - 116% |
Expected dividend yield | Nil | Nil | Nil |
Weighted average Black-Scholes value of each unit | $0.56 | $1.13 - $1.17 | $0.67 - $23.55 |
Volatility was estimated by using the historical volatility of peer companies that the Company considers comparable, which have trading and volatility history.Company. The expected life in years represents the period of time that the units granted are expected to be outstanding. The risk-free rate was based on Government of Canada bond rates of comparable duration.
F-37
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Equity-settled plans
| a) | Simple and performance warrants |
The Company issued simple warrants and performance warrants to employees, directors and others at the discretion of the Board. Simple and performance warrants granted generally vest annually in thirds over a three-year period, andsimple warrants expire five years after the grant date.date and performance warrants do not expire.
The following table summarizes changes in the simple and performance warrants during the year ended December 31, 2019:2021:
|
| Simple warrants outstanding |
|
| Weighted average exercise price |
|
| Performance warrants outstanding |
|
| Weighted average exercise price |
| ||||
Balance at December 31, 2018 |
|
| 6,129,866 |
|
| $ | 1.80 |
|
|
| 7,094,822 |
|
| $ | 2.04 |
|
Granted |
|
| 4,795,200 |
|
|
| 6.32 |
|
|
| 723,200 |
|
|
| 12.23 |
|
Cancelled |
|
| (733,866 | ) |
|
| 2.32 |
|
|
| (366,400 | ) |
|
| 1.21 |
|
Exercised |
|
| (376,200 | ) |
|
| 0.85 |
|
|
| (1,652,800 | ) |
|
| 0.63 |
|
Balance at December 31, 2019 |
|
| 9,815,000 |
|
| $ | 4.01 |
|
|
| 5,798,822 |
|
| $ | 2.66 |
|
|
| Simple warrants outstanding |
|
| Weighted average exercise price |
|
| Performance warrants outstanding |
|
| Weighted average exercise price |
| ||||
Balance at December 31, 2020 |
|
| 3,424,600 |
|
| $ | 4.41 |
|
|
| 1,672,000 |
|
| $ | 4.19 |
|
Forfeited |
|
| (668,800 | ) |
|
| 3.36 |
|
|
| (204,800 | ) |
|
| 5.48 |
|
Exercised |
|
| (120,000 | ) |
|
| 0.94 |
|
|
| (80,000 | ) |
|
| 1.09 |
|
Expired |
|
| (41,600 | ) |
|
| 3.45 |
|
|
| — |
|
|
| 0.00 |
|
Balance at December 31, 2021 |
|
| 2,594,200 |
|
| $ | 4.86 |
|
|
| 1,387,200 |
|
| $ | 4.18 |
|
The following table summarizes changes in the simple and performance warrants during the ten monthsyear ended December 31, 2018:2020:
|
| Simple warrants outstanding |
|
| Weighted average exercise price |
|
| Performance warrants outstanding |
|
| Weighted average exercise price |
| ||||
Balance at December 31, 2019 |
|
| 9,815,000 |
|
| $ | 4.01 |
|
|
| 5,798,822 |
|
| $ | 2.66 |
|
Forfeited |
|
| (6,390,400 | ) |
|
| 3.79 |
|
|
| (4,126,822 | ) |
|
| 2.04 |
|
Balance at December 31, 2020 |
|
| 3,424,600 |
|
| $ | 4.41 |
|
|
| 1,672,000 |
|
| $ | 4.19 |
|
F-32The following table summarizes outstanding simple and performance warrants as at December 31, 2021:
|
| Warrants outstanding |
|
| Warrants exercisable |
| ||||||||||||||||||
Range of exercise prices |
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
|
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
| ||||||
Simple warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 - $0.94 |
|
| 889,400 |
|
|
| 0.72 |
|
|
| 2.21 |
|
|
| 889,400 |
|
|
| 0.72 |
|
|
| 2.21 |
|
$1.25 - $1.88 |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
|
| 0 |
|
|
| 0 |
|
|
| — |
|
$2.97 - $4.53 |
|
| 351,200 |
|
|
| 3.09 |
|
|
| 3.09 |
|
|
| 303,200 |
|
|
| 3.06 |
|
|
| 3.02 |
|
$6.25 - $9.38 |
|
| 1,219,200 |
|
|
| 6.29 |
|
|
| 4.72 |
|
|
| 499,200 |
|
|
| 6.35 |
|
|
| 4.70 |
|
$12.50 - $37.50 |
|
| 134,400 |
|
|
| 23.91 |
|
|
| 5.52 |
|
|
| 40,000 |
|
|
| 19.61 |
|
|
| 4.05 |
|
|
|
| 2,594,200 |
|
| $ | 4.86 |
|
|
| 3.68 |
|
|
| 1,731,800 |
|
| $ | 3.19 |
|
|
| 3.11 |
|
Performance warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 - $0.94 |
|
| 458,667 |
|
|
| 0.68 |
|
| n/a |
|
|
| 458,667 |
|
|
| 0.68 |
|
| n/a |
| ||
$1.25 - $1.88 |
|
| 189,333 |
|
|
| 1.51 |
|
| n/a |
|
|
| 181,333 |
|
|
| 1.50 |
|
| n/a |
| ||
$2.97 - $4.53 |
|
| 504,000 |
|
|
| 3.16 |
|
| n/a |
|
|
| 504,000 |
|
|
| 3.16 |
|
| n/a |
| ||
$6.25 - $9.38 |
|
| 144,533 |
|
|
| 7.23 |
|
| n/a |
|
|
| 38,400 |
|
|
| 6.25 |
|
| n/a |
| ||
$12.50 - $37.50 |
|
| 90,667 |
|
|
| 28.24 |
|
| n/a |
|
|
| 0 |
|
|
| 0 |
|
| n/a |
| ||
|
|
| 1,387,200 |
|
| $ | 4.18 |
|
| n/a |
|
|
| 1,182,400 |
|
| $ | 2.04 |
|
| n/a |
|
F-38
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
| Simple warrants outstanding |
|
| Weighted average exercise price |
|
| Performance warrants outstanding |
|
| Weighted average exercise price |
| |||||
Balance at February 28, 2018 |
|
| 2,904,000 |
|
| $ | 0.82 |
|
|
| 8,125,334 |
|
| $ | 1.39 |
|
Granted |
|
| 3,535,200 |
|
|
| 2.61 |
|
|
| 2,188,800 |
|
|
| 2.48 |
|
Cancelled |
|
| (293,334 | ) |
|
| 0.94 |
|
|
| (360,002 | ) |
|
| — |
|
Exercised |
|
| (16,000 | ) |
|
| 0.63 |
|
|
| (2,859,310 | ) |
|
| 0.71 |
|
Balance at December 31, 2018 |
|
| 6,129,866 |
|
| $ | 1.80 |
|
|
| 7,094,822 |
|
| $ | 2.04 |
|
The following table summarizes changes in the simple and performance warrants during the year ended February 28, 2018:
|
| Simple warrants outstanding |
|
| Weighted average exercise price |
|
| Performance warrants outstanding |
|
| Weighted average exercise price |
| ||||
Balance at February 28, 2017 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
Granted |
|
| 2,904,000 |
|
|
| 0.82 |
|
|
| 8,125,334 |
|
|
| 1.39 |
|
Balance at February 28, 2018 |
|
| 2,904,000 |
|
| $ | 0.82 |
|
|
| 8,125,334 |
|
| $ | 1.39 |
|
The following table summarizes outstanding simple and performance warrants as at December 31, 2019:
|
| Warrants outstanding |
|
| Warrants exercisable |
| ||||||||||||||||||
Range of exercise prices |
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
|
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
| ||||||
Simple warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 - $0.94 |
|
| 4,019,000 |
|
|
| 0.68 |
|
|
| 5.62 |
|
|
| 3,635,000 |
|
|
| 0.68 |
|
|
| 5.62 |
|
$1.25 - $1.88 |
|
| 560,000 |
|
|
| 1.50 |
|
|
| 10.18 |
|
|
| 560,000 |
|
|
| 1.50 |
|
|
| 10.18 |
|
$2.97 - $4.53 |
|
| 1,232,000 |
|
|
| 3.18 |
|
|
| 5.62 |
|
|
| 848,000 |
|
|
| 3.10 |
|
|
| 5.11 |
|
$6.25 - $9.38 |
|
| 3,462,400 |
|
|
| 6.37 |
|
|
| 4.50 |
|
|
| 80,000 |
|
|
| 6.25 |
|
|
| 4.44 |
|
$12.50 - $37.50 |
|
| 541,600 |
|
|
| 18.08 |
|
|
| 7.87 |
|
|
| 9,600 |
|
|
| 21.88 |
|
|
| 9.05 |
|
|
|
| 9,815,000 |
|
| $ | 4.01 |
|
|
| 5.61 |
|
|
| 5,132,600 |
|
| $ | 1.29 |
|
|
| 6.02 |
|
Performance warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 - $0.94 |
|
| 3,700,690 |
|
|
| 0.64 |
|
| n/a |
|
|
| 3,546,022 |
|
|
| 0.64 |
|
| n/a |
| ||
$1.25 - $1.88 |
|
| 646,933 |
|
|
| 1.52 |
|
| n/a |
|
|
| 381,334 |
|
|
| 1.48 |
|
| n/a |
| ||
$2.97 - $4.53 |
|
| 788,000 |
|
|
| 3.09 |
|
| n/a |
|
|
| 490,666 |
|
|
| 3.08 |
|
| n/a |
| ||
$6.25 - $9.38 |
|
| 362,933 |
|
|
| 6.97 |
|
| n/a |
|
|
| 38,400 |
|
|
| 6.25 |
|
| n/a |
| ||
$12.50 - $37.50 |
|
| 300,266 |
|
|
| 23.72 |
|
| n/a |
|
|
| — |
|
|
| — |
|
| n/a |
| ||
|
|
| 5,798,822 |
|
| $ | 2.66 |
|
| n/a |
|
|
| 4,456,422 |
|
| $ | 1.02 |
|
| n/a |
|
F-33
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The following table summarizes outstanding simple and performance warrants as at December 31, 2018:
|
| Warrants outstanding |
|
| Warrants exercisable |
| ||||||||||||||||||
Range of exercise prices |
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
|
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
| ||||||
Simple warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 - $0.94 |
|
| 3,629,866 |
|
|
| 0.73 |
|
|
| 5.46 |
|
|
| 1,765,331 |
|
|
| 0.73 |
|
|
| 5.46 |
|
$1.25 - $1.88 |
|
| 880,000 |
|
|
| 1.52 |
|
|
| 11.25 |
|
|
| — |
|
|
| — |
|
|
| — |
|
$2.97 - $4.53 |
|
| 1,331,200 |
|
|
| 3.24 |
|
|
| 6.78 |
|
|
| 328,000 |
|
|
| 2.97 |
|
|
| 6.59 |
|
$6.25 - $9.38 |
|
| 190,400 |
|
|
| 7.16 |
|
|
| 5.20 |
|
|
| 80,000 |
|
|
| 6.25 |
|
|
| 4.00 |
|
$12.50 - $15.63 |
|
| 98,400 |
|
|
| 13.87 |
|
|
| 9.46 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| 6,129,866 |
|
| $ | 1.80 |
|
|
| 6.63 |
|
|
| 2,173,331 |
|
| $ | 1.28 |
|
|
| 5.58 |
|
Performance warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 - $1.25 |
|
| 4,053,222 |
|
|
| 0.68 |
|
| n/a |
|
|
| 1,924,690 |
|
|
| 0.64 |
|
| n/a |
| ||
$1.56 - $3.13 |
|
| 1,221,600 |
|
|
| 2.50 |
|
| n/a |
|
|
| 120,000 |
|
|
| 2.97 |
|
| n/a |
| ||
$3.75 - $5.00 |
|
| 1,640,000 |
|
|
| 4.36 |
|
| n/a |
|
|
| — |
|
|
| — |
|
| n/a |
| ||
$6.25 - $21.88 |
|
| 180,000 |
|
|
| 8.33 |
|
| n/a |
|
|
| — |
|
|
| — |
|
| n/a |
| ||
|
|
| 7,094,822 |
|
| $ | 2.04 |
|
| n/a |
|
|
| 2,044,690 |
|
| $ | 0.78 |
|
| n/a |
|
The following table summarizes outstanding simple and performance warrants as at February 28, 2018:
|
| Warrants outstanding |
|
| Warrants exercisable |
| ||||||||||||||||||
Range of exercise prices |
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
|
| Number of warrants |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
| ||||||
Simple warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 |
|
| 2,096,000 |
|
|
|
|
|
|
| 5.26 |
|
|
| 350,400 |
|
|
|
|
|
|
| 5.26 |
|
$0.94 |
|
| 696,000 |
|
|
|
|
|
|
| 6.79 |
|
|
| — |
|
|
|
|
|
|
| — |
|
$1.25 |
|
| 112,000 |
|
|
|
|
|
|
| 7.51 |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
|
| 2,904,000 |
|
| $ | 0.82 |
|
|
| 6.20 |
|
|
| 350,400 |
|
| $ | 0.63 |
|
|
| 5.26 |
|
Performance warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.63 |
|
| 5,853,333 |
|
|
|
|
|
| n/a |
|
|
| 3,432,000 |
|
|
|
|
|
| n/a |
| ||
$0.94 |
|
| 210,667 |
|
|
|
|
|
| n/a |
|
|
| — |
|
|
|
|
|
| n/a |
| ||
$1.25 |
|
| 210,667 |
|
|
|
|
|
| n/a |
|
|
| — |
|
|
|
|
|
| n/a |
| ||
$1.56 - $1.88 |
|
| 250,667 |
|
|
|
|
|
| n/a |
|
|
| — |
|
|
|
|
|
| n/a |
| ||
$3.75 - $5.00 |
|
| 1,600,000 |
|
|
|
|
|
| n/a |
|
|
| — |
|
|
|
|
|
| n/a |
| ||
|
|
| 8,125,334 |
|
| $ | 1.39 |
|
| n/a |
|
|
| 3,432,000 |
|
| $ | 0.63 |
|
| n/a |
|
During the year ended December 31, 2019, the Company granted 4,795,200 simple warrants with an average exercise price of $6.32 (ten months ended December 31, 2018 – 3,535,200 simple warrants with an average exercise price of $2.61, year ended February 28, 2018 – 2,904,000 simple warrants with an average exercise price of $0.82) and 723,200 performance warrants with an average exercise price of $12.23 (ten months ended December 31, 2018 – 2,188,800 performance warrants with an average exercise price of $2.48, year ended February 28, 2018 – 8,125,334 performance warrants with an average exercise price of $1.39).
During year ended December 31, 2019, 376,200 simple warrants were exercised at a weighted average price of $0.85 (ten months ended December 31, 2018 – 16,000 simple warrants were exercised at a weighted average price of $0.63, year ended February 28, 2018 - nil) and 1,652,800 performance warrants were exercised at a weighted average price of $0.63 (ten months ended December 31, 2018 – 2,859,310 performance warrants were exercised at a weighted average price of $0.71, year ended February 28, 2018 - nil). As a result of the warrant exercises, a total of $16.3 million was transferred from contributed surplus to share capital.
F-34
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company issues stock options to employees directors and others at the discretion of the Board. Stock options granted generally vest annually in thirds over a three-year period and expire ten years after the grant date.
The following table summarizes changes in the stock options during the year ended December 31, 2019:2021:
|
| Stock options outstanding |
|
| Weighted average exercise price |
| ||
Balance at December 31, 2018 |
|
| — |
|
| $ | — |
|
Granted |
|
| 623,850 |
|
|
| 4.33 |
|
Balance at December 31, 2019 |
|
| 623,850 |
|
| $ | 4.33 |
|
|
| Stock options outstanding |
|
| Weighted average exercise price |
| ||
Balance at December 31, 2020 |
|
| 720,600 |
|
| $ | 1.82 |
|
Forfeited |
|
| (275,000 | ) |
|
| 2.60 |
|
Expired |
|
| (1,000 | ) |
|
| 3.15 |
|
Balance at December 31, 2021 |
|
| 444,600 |
|
| $ | 1.33 |
|
NaN stock options were granted in 2021. The following table summarizes changes in stock options during the year ended December 31, 2020:
|
| Stock options outstanding |
|
| Weighted average exercise price |
| ||
Balance at December 31, 2019 |
|
| 623,850 |
|
| $ | 4.33 |
|
Granted |
|
| 481,600 |
|
|
| 1.16 |
|
Forfeited |
|
| (384,850 | ) |
|
| 4.96 |
|
Balance at December 31, 2020 |
|
| 720,600 |
|
| $ | 1.82 |
|
The following table summarizes outstanding stock options as at December 31, 2019:2021:
|
| Stock options outstanding |
|
| Stock options exercisable |
| ||||||||||||||||||
Range of exercise prices |
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
|
| Number of options |
|
| Weighted average exercise price |
|
| Weighted average contractual life (years) |
| ||||||
$3.12 - $5.80 |
|
| 373,850 |
|
|
| 3.12 |
|
|
| 9.21 |
|
|
| 22,500 |
|
|
| 3.12 |
|
|
| 4.97 |
|
$5.81 - $5.86 |
|
| 250,000 |
|
|
| 5.86 |
|
|
| 6.37 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| 623,850 |
|
| $ | 4.33 |
|
|
| 7.97 |
|
|
| 22,500 |
|
| $ | 3.12 |
|
|
| 4.97 |
|
|
| Stock options outstanding |
|
| Stock options exercisable |
| ||||||||||
Exercise prices |
| Number of options |
|
| Weighted average contractual life (years) |
|
| Number of options |
|
| Weighted average contractual life (years) |
| ||||
$1.15 |
|
| 325,000 |
|
|
| 8.41 |
|
|
| 108,332 |
|
|
| 8.41 |
|
$1.19 |
|
| 81,600 |
|
|
| 8.49 |
|
|
| 81,600 |
|
|
| 8.49 |
|
$3.15 |
|
| 38,000 |
|
|
| 6.35 |
|
|
| 20,500 |
|
|
| 6.06 |
|
|
|
| 444,600 |
|
|
| 8.25 |
|
|
| 210,432 |
|
|
| 8.21 |
|
During the year ended December 31, 2019, the Company granted 623,850 stock options with an average exercise price of $4.33.
| c) | Restricted |
RSUs are granted to employees and the vesting requirements and maximum term are at the discretion of the Board. DSUs are granted to directors and generally vest in equal quarterly instalments over a one year. RSUs and DSUs are exchangeable for an equal number of common shares.
The following table summarizes changes in RSUs during the year ended December 31, 2021:
RSUs outstanding | ||||||
Balance at December 31, 2020 | 1,656,916 | |||||
Granted | 12,381,525 | |||||
Forfeited | (1,582,628 | ) | ||||
Exercised | (4,919,883 | ) | ||||
Balance at December 31, 2021 | 7,535,930 |
F-39
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The following table summarizes changes in RSUs during the year ended December 31, 2020:
RSUs outstanding | ||||||||
Balance at December 31, 2019 | 48,883 | |||||||
Granted | 3,002,213 | |||||||
Forfeited | (43,813 | ) | ||||||
Exercised | (1,350,367 | ) | ||||||
Balance at December 31, 2020 | 1,656,916 |
Subsequent to December 31, 2021, the Company granted 15.6 million RSUs to employees as part of its long-term incentive program.
Cash-settled plans
d) | Deferred share units |
DSUs are granted to directors and generally vest in equal instalments over one year. The Company intended to settle the DSUs asby issuing common shares, however, during the year ended December 31, 2021, the Company changed its intention to settle the DSUs to making a cash payment to the holder equal to the fair value of the Company’s common shares calculated at the date of such payment. Accordingly, $5.1 million representing the previously recognized fair value of the DSUs, was reclassified from contributed surplus to other liabilities.
As at December 31, 2019:2021, included in other liabilities is $4.0 million relating to the fair value of cash-settled DSUs (note 21).
The following table summarizes changes in DSUs during the year ended December 31, 2021:
|
| RSUs outstanding |
|
| DSUs outstanding |
| ||
Balance at December 31, 2018 |
|
| — |
|
|
| — |
|
Granted |
|
| 107,543 |
|
|
| 378,080 |
|
Cancelled |
|
| (700 | ) |
|
| (7,617 | ) |
Settled |
|
| — |
|
|
| (2,539 | ) |
Exercised |
|
| (57,960 | ) |
|
| — |
|
Balance at December 31, 2019 |
|
| 48,883 |
|
|
| 367,924 |
|
DSUs outstanding | ||||||
Balance at December 31, 2020 | 3,323,263 | |||||
Granted | 2,489,173 | |||||
Exercised | (300,000 | ) | ||||
Balance at December 31, 2021 | 5,512,436 |
As at December 31, 2021, 0.6 million DSUs were exercisable.
The following table summarizes changes in DSUs during the year ended December 31, 2020:
DSUs outstanding | ||||||||
Balance at December 31, 2019 | 367,924 | |||||||
Granted | 3,265,503 | |||||||
Forfeited | (310,164 | ) | ||||||
Balance at December 31, 2020 | 3,323,263 |
|
|
The Company’sCannabis revenue is solelyderived from contracts with customers and is comprised of revenue from the sale of cannabis and ornamental flowers. Cannabis revenue is comprised of sales to Provincial boards that sell cannabis through their respective distribution models, sales to licensed producers for further processing, and sales to medical customers. Ornamental flowerRetail revenue is comprisedderived from retail cannabis sales to customers, franchise revenue consisting of salesroyalty, advertising and franchise fee revenue, and other revenue consisting of ornamental flowersmillwork, supply and herbs to customers.accessories revenue.
F-35F-40
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| Year ended December 31 |
| |||||||||||
| 2019 |
| 2018 |
| 2018 |
| 2021 |
| 2020 |
| 2019 |
| ||||||
Cannabis revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Provincial boards |
| 13,386 |
|
| — |
| — |
|
| 41,338 |
|
| 55,315 |
| 13,386 |
| ||
Medical |
| 24 |
|
| — |
| — |
|
| 8 |
|
| 32 |
| 24 |
| ||
Licensed producers |
| 53,517 |
|
| — |
| — |
|
| 9,842 |
|
| 17,974 |
| 53,517 |
| ||
Cannabis revenue |
| 66,927 |
| — |
| — |
| |||||||||||
Ornamental flower revenue |
| 12,298 |
|
| — |
| — |
| ||||||||||
Cannabis revenue (1) |
| 51,188 |
|
| 73,321 |
| 66,927 |
| ||||||||||
Retail revenue (2) |
|
|
|
|
|
|
|
| ||||||||||
Retail |
| 10,207 |
|
| — |
| — |
| ||||||||||
Franchise |
| 4,251 |
|
| — |
| — |
| ||||||||||
Other (millwork, supply, accessories) |
| 1,633 |
|
| — |
| — |
| ||||||||||
Retail revenue |
| 16,091 |
|
| — |
| — |
| ||||||||||
Gross revenue |
| 79,225 |
|
| — |
| — |
|
| 67,279 |
|
| 73,321 |
| 66,927 |
|
| (1) | The Company had |
| (2) |
|
The following table disaggregates cannabis revenue by form for the periods noted:
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Revenue from dried flower |
| 39,572 |
|
| 51,424 |
|
| 58,246 |
|
Revenue from vapes |
| 4,743 |
|
| 18,447 |
|
| 504 |
|
Revenue from oil |
| 1,665 |
|
| 3,145 |
|
| 8,177 |
|
Revenue from edibles and concentrates |
| 2,555 |
|
| 305 |
|
| — |
|
Revenue from services |
| 2,653 |
|
| — |
|
| — |
|
Gross revenue |
| 51,188 |
|
| 73,321 |
|
| 66,927 |
|
The Company has recognized the following receivables from contracts with customers:
| December 31, 2019 |
| December 31, 2018 |
| February 28, 2018 |
| |||
Receivables, included in 'trade receivables' (note 7) |
| 24,684 |
|
| 209 |
|
| — |
|
| December 31, 2021 |
| December 31, 2020 |
| December 31, 2019 |
| |||
Receivables, included in 'trade receivables' (note 10) |
| 10,865 |
|
| 15,786 |
|
| 20,281 |
|
Receivables from contracts with customers are typically settled within 30 days. As at December 31, 2019,2021, an impairment loss of $0.6$0.2 million (December 31, 2020 - $0.5 million reversal) has been recognized on receivables from contracts with customers (note 26)32).
|
|
|
|
| Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| |||
| 2019 |
| 2018 |
| 2018 |
| |||
Salaries and wages |
| 17,527 |
|
| 3,847 |
|
| 859 |
|
Consulting fees |
| 6,896 |
|
| 1,647 |
|
| 828 |
|
Office and general |
| 10,599 |
|
| 1,738 |
|
| 495 |
|
Professional fees |
| 5,419 |
|
| 877 |
|
| 673 |
|
Director fees |
| 188 |
|
| 30 |
|
| 60 |
|
Other |
| 3,820 |
|
| 170 |
|
| 229 |
|
|
| 44,449 |
|
| 8,309 |
|
| 3,144 |
|
|
|
| Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| |||
| 2019 |
| 2018 |
| 2018 |
| |||
Marketing |
| 3,913 |
|
| 1,733 |
|
| 1,176 |
|
Events |
| 2,961 |
|
| — |
|
| — |
|
Research |
| 199 |
|
| 24 |
|
| — |
|
Media |
| 1,815 |
|
| 623 |
|
| 98 |
|
|
| 8,888 |
|
| 2,380 |
|
| 1,274 |
|
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Interest and fee revenue |
|
|
|
|
|
|
|
|
|
Interest revenue from investments at amortized cost |
| 1,654 |
|
| 0 |
|
| 0 |
|
Interest and fee revenue from investments at FVTPL |
| 8,514 |
|
| 0 |
|
| 0 |
|
Interest revenue from cash |
| 2,981 |
|
| 0 |
|
| 0 |
|
|
| 13,149 |
|
| 0 |
|
| 0 |
|
F-36F-41
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
| Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| |||
| 2019 |
| 2018 |
| 2018 |
| |||
Cash finance expense |
|
|
|
|
|
|
|
|
|
Interest on Syndicated Credit Agreement |
| 1,746 |
|
| — |
|
| — |
|
Interest on Credit Facilities |
| 1,818 |
|
| 437 |
|
| — |
|
Interest on Term Debt Facility |
| 5,714 |
|
| — |
|
| — |
|
Interest on Senior Convertible Notes |
| 375 |
|
| — |
|
| — |
|
Interest on Convertible Notes |
| 2,574 |
|
| 421 |
|
| — |
|
Interest on other debt |
| 1,651 |
|
| 1,659 |
|
| — |
|
Other finance costs |
| 2,659 |
|
| 399 |
|
| 75 |
|
|
| 16,537 |
|
| 2,916 |
|
| 75 |
|
Non-cash finance expense |
|
|
|
|
|
|
|
|
|
Accretion |
| 6,696 |
|
| 594 |
|
| — |
|
Amortization of debt issue costs |
| 1,730 |
|
| 172 |
|
| — |
|
Interest on Senior Convertible Notes |
| 1,903 |
|
| — |
|
| — |
|
Loss on derivative liabilities |
| 1,649 |
|
| — |
|
| — |
|
Loss on extinguishment of debt issue costs |
| 488 |
|
| — |
|
| — |
|
Other |
| 475 |
|
| 151 |
|
| — |
|
|
| 12,941 |
|
| 917 |
|
| — |
|
Less: interest capitalized relating to CIP (note 10) |
| (1,280 | ) |
| (2,036 | ) |
| — |
|
|
| 28,198 |
|
| 1,797 |
|
| 75 |
|
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Investment revenue |
|
|
|
|
|
|
|
|
|
Realized gains |
| 20,213 |
|
| 0 |
|
| 0 |
|
Unrealized losses (note 9) |
| (64,714 | ) |
| 0 |
|
| 0 |
|
|
| (44,501 | ) |
| 0 |
|
| 0 |
|
|
|
A) | General and administrative |
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Salaries and wages |
| 18,675 |
|
| 11,634 |
|
| 15,262 |
|
Consulting fees |
| 1,112 |
|
| 2,193 |
|
| 6,896 |
|
Office and general |
| 7,560 |
|
| 9,843 |
|
| 9,533 |
|
Professional fees |
| 6,530 |
|
| 4,658 |
|
| 3,559 |
|
Director fees |
| 351 |
|
| 365 |
|
| 188 |
|
Other |
| 4,142 |
|
| 3,336 |
|
| 3,496 |
|
|
| 38,370 |
|
| 32,029 |
|
| 38,934 |
|
B) | Sales and marketing |
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Marketing |
| 3,671 |
|
| 4,839 |
|
| 3,093 |
|
Events |
| 191 |
|
| 393 |
|
| 2,961 |
|
Research |
| 43 |
|
| 57 |
|
| 199 |
|
Media |
| 1,138 |
|
| 448 |
|
| 1,815 |
|
|
| 5,043 |
|
| 5,737 |
|
| 8,068 |
|
28. | Government subsidies |
| Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| |||
| 2019 |
| 2018 |
| 2018 |
| |||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
Accounts receivable |
| (15,267 | ) |
| (2,469 | ) |
| 118 |
|
Biological assets |
| 18,659 |
|
| (2,102 | ) |
| — |
|
Inventory |
| (57,985 | ) |
| (923 | ) |
| — |
|
Prepaid expenses and deposits |
| (7,213 | ) |
| 1,072 |
|
| (3,726 | ) |
Accounts payable and accrued liabilities |
| 18,476 |
|
| 14,421 |
|
| 4,823 |
|
Convertible notes |
| (152 | ) |
| — |
|
| — |
|
Deferred tax |
| (115 | ) |
| — |
|
| — |
|
Contingent consideration |
| (582 | ) |
| — |
|
| — |
|
Finance leases |
| — |
|
| 107 |
|
| — |
|
|
| (44,179 | ) |
| 10,106 |
|
| 1,215 |
|
|
|
|
|
|
|
|
|
|
|
Changes in non-cash working capital relating to: |
|
|
|
|
|
|
|
|
|
Operating |
| (47,403 | ) |
| 1,217 |
|
| 910 |
|
Investing |
| 1,077 |
|
| 10,282 |
|
| (2,121 | ) |
Financing |
| 2,147 |
|
| (1,393 | ) |
| 2,426 |
|
|
| (44,179 | ) |
| 10,106 |
|
| 1,215 |
|
|
|
|
|
|
|
|
|
|
|
Cash interest paid |
| 13,753 |
|
| 919 |
|
| — |
|
In March 2020, the federal government launched the Canadian Emergency Wage Subsidy (“CEWS”) to help businesses impacted by the COVID-19 pandemic keep and rehire employees.
F-37The Company became eligible for the CEWS based on decreases in revenue and for the year ended December 31, 2021, the subsidy of $2.1 million (2020 - $4.0 million) was recognized in the consolidated statement of loss and comprehensive loss. There are no unfulfilled conditions or contingencies attached to the CEWS.
In October 2020, the federal government launched the Canadian Emergency Rent Subsidy (“CERS”) to help businesses impacted by the COVID-19 pandemic cover part of their commercial rent or property taxes. The CERS program provides a base rent subsidy that is available to organizations that continue to see decreasing revenues and an additional top up for organizations that must either close or significantly restrict their activities due to a public health order. CERS was available from September 27, 2020, until June 2021.
F-42
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The following table reconciles long-term debtCompany became eligible for CERS based on decreases in revenue and for the year ended December 31, 2020, the subsidy of $0.1 million was recognized in the consolidated statement of loss and comprehensive loss. There are no unfulfilled conditions or contingencies attached to cash flows arising from financing activities:the CERS.
29. | Finance costs |
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Cash finance expense |
|
|
|
|
|
|
|
|
|
Interest on Syndicated Credit Agreement |
| — |
|
| 4,546 |
|
| 1,746 |
|
Interest on Term Debt Facility |
| — |
|
| 2,936 |
|
| 3,478 |
|
Other finance costs |
| 40 |
|
| 286 |
|
| 9,202 |
|
|
| 40 |
|
| 7,768 |
|
| 14,426 |
|
Non-cash finance expense (income) |
|
|
|
|
|
|
|
|
|
Change in fair value of investment at FVTPL |
| 3,300 |
|
| — |
|
| — |
|
Interest on lease liabilities |
| 776 |
|
| — |
|
| — |
|
Financial guarantee liability recovery |
| 59 |
|
| — |
|
| — |
|
Accretion |
| — |
|
| 1,622 |
|
| 5,511 |
|
Amortization of debt issue costs |
| — |
|
| 1,782 |
|
| 1,586 |
|
Change in fair value of convertible notes |
| — |
|
| (7,141 | ) |
| — |
|
Other |
| 154 |
|
| 3 |
|
| 3,973 |
|
|
| 4,289 |
|
| (3,734 | ) |
| 11,070 |
|
Interest income |
| (573 | ) |
| (215 | ) |
| — |
|
Interest capitalized relating to CIP |
| — |
|
| — |
|
| (1,280 | ) |
|
| 3,756 |
|
| 3,819 |
|
| 24,216 |
|
F-43
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
30. |
| |||
|
| |||
| ||||
|
| |||
|
| |||
| ||||
|
| |||
|
| |||
| ||||
|
| |||
|
| |||
| ||||
|
| |||
|
|
| ||
|
| |||
|
|
| ||
|
| |||
| ||||
|
| |||
|
| |||
|
| |||
|
|
| ||
|
| Supplemental cash flow disclosures |
(1)Long-term debt, including the current portion of long-term debt
| Year ended December 31 |
| |||||||
| 2021 |
| 2020 |
| 2019 |
| |||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
Accounts receivable |
| 7,328 |
|
| (2,037 | ) |
| (19,625 | ) |
Biological assets |
| 3,829 |
|
| 13,789 |
|
| 19,328 |
|
Inventory |
| (18,318 | ) |
| (12,315 | ) |
| (57,977 | ) |
Prepaid expenses and deposits |
| (3,922 | ) |
| 2,280 |
|
| (7,213 | ) |
Investments |
| (402 | ) |
| — |
|
| — |
|
Property, plant and equipment |
| 22 |
|
| — |
|
| — |
|
Accounts payable and accrued liabilities |
| 9,665 |
|
| (20,793 | ) |
| 27,819 |
|
Convertible notes |
| — |
|
| — |
|
| (152 | ) |
|
| (1,798 | ) |
| (19,076 | ) |
| (37,820 | ) |
|
|
|
|
|
|
|
|
|
|
Changes in non-cash working capital relating to: |
|
|
|
|
|
|
|
|
|
Operating |
| (1,534 | ) |
| (5,259 | ) |
| (41,626 | ) |
Investing |
| (612 | ) |
| (11,319 | ) |
| 1,659 |
|
Financing |
| 348 |
|
| (2,498 | ) |
| 2,147 |
|
|
| (1,798 | ) |
| (19,076 | ) |
| (37,820 | ) |
|
|
|
|
|
|
|
|
|
|
Cash interest paid |
| — |
|
| 6,094 |
|
| 13,753 |
|
| Loss per share |
|
| Year ended December 31 |
|
| Ten months ended December 31 |
|
| Year ended February 28 |
| |||
|
| 2019 |
|
| 2018 |
|
| 2018 |
| |||
Net loss |
|
| (271,629 | ) |
|
| (56,526 | ) |
|
| (12,995 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000s) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and dilutive (1) |
|
| 85,750 |
|
|
| 69,203 |
|
|
| 56,922 |
|
Loss per share – basic and dilutive |
| $ | (3.17 | ) |
| $ | (0.82 | ) |
| $ | (0.23 | ) |
|
| Year ended December 31 |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Weighted average shares outstanding (000s) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (1) |
|
| 1,860,380 |
|
|
| 218,645 |
|
|
| 85,750 |
|
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sundial Growers Inc. |
|
| (230,382 | ) |
|
| (199,619 | ) |
|
| (142,533 | ) |
Per share - basic and diluted |
| $ | (0.12 | ) |
| $ | (0.92 | ) |
| $ | (1.67 | ) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sundial Growers Inc. |
|
| — |
|
|
| (33,627 | ) |
|
| (128,931 | ) |
Per share - basic and diluted |
| $ | — |
|
| $ | (0.15 | ) |
| $ | (1.50 | ) |
Net loss attributable to Sundial Growers Inc. |
|
| (230,382 | ) |
|
| (233,246 | ) |
|
| (271,464 | ) |
Per share - basic and diluted |
| $ | (0.12 | ) |
| $ | (1.07 | ) |
| $ | (3.17 | ) |
| (1) | For the year ended December 31, |
F-44
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
| Financial instruments |
The financial instruments recognized on the consolidated statement of financial position are comprised of cash and cash equivalents, restricted cash, marketable securities, accounts receivable, investments at amortized cost, investments at FVTPL, accounts payable and accrued liabilities long-term debt, convertible notes and contingent consideration.derivative warrants.
|
| Fair value |
The carrying value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued liabilities approximate thetheir fair value of the respective assets and liabilities due to the short-term nature of thosethe instruments. The carrying value of investments at amortized cost approximate their fair value as the fixed interest rates approximate market rates for comparable transactions.
F-38
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
Fair value measurements of long-term debt, convertible notesmarketable securities, investments at FVTPL and contingent considerationderivative warrants are as follows:
|
|
|
| Fair value measurements using |
| |||||||
December 31, 2019 | Carrying amount |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Recurring measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
| 177,913 |
|
| — |
|
| 177,913 |
|
| — |
|
Contingent consideration |
| 32,501 |
|
| — |
|
| — |
|
| 32,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value measurements using |
| |||||||
December 31, 2018 | Carrying amount |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Recurring measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
| 54,636 |
|
| — |
|
| 54,636 |
|
| — |
|
Convertible Notes |
| 25,449 |
|
| — |
|
| 25,449 |
|
| — |
|
|
|
|
| Fair value measurements using |
| |||||||
December 31, 2021 | Carrying amount |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Recurring measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
| 83,724 |
|
| 83,724 |
|
| 0 |
|
| 0 |
|
Investments at FVTPL |
| 48,576 |
|
| 0 |
|
| 0 |
|
| 48,576 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrants (1) |
| 21,700 |
|
| 0 |
|
| 0 |
|
| 21,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value measurements using |
| |||||||
December 31, 2020 | Carrying amount |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Recurring measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Investments at FVTPL |
| 51,876 |
|
| 0 |
|
| 0 |
|
| 51,876 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrants (1) |
| 428 |
|
| 0 |
|
| 0 |
|
| 428 |
|
(1) | The carrying amount is an estimate of the fair value of the derivative warrants and is presented as a current liability. The Company has no cash obligation with respect to the derivative warrants, rather it will deliver common shares if and when warrants are exercised. |
Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
As at December 31, 2019,Marketable securities are designated as FVTPL. The fair value of marketable securities is re-measured each reporting period with changes in fair value recognized in the Company did not have any financial instruments measured at Level 1consolidated statement of loss and comprehensive loss. The fair value.value of marketable securities is estimated by using current quoted prices in active markets for identical assets.
Level 2 – quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
TheAs at December 31, 2021, the Company did not have any financial instruments measured at Level 2 fair value of long-term debt approximates it carrying value as it bears a floating rate of interest (Syndicated Credit Agreement) and interest at a fixed rate of 9.75% which approximates a market rate for comparable transactions (Term Debt Facility).
The convertible notes bear interest at a fixed rate of 12%, however the carrying value has been determined using an interest rate of 18% which approximates a market rate for comparable financing transactions.value.
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Contingent consideration classifiedThe investment designated as liabilities as part of the consideration paid for Bridge Farm (note 5a) is a Level 3 financial liability thatFVTPL is re-measured each reporting period. Contingent consideration was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculations include expected future share price, discount rate and various probability factors. The settlement of contingent consideration could differ from current estimated based on the actual results of these financial measures.
At December 31, 2019, a US$0.50 changeperiod with changes in the expected future share price would changefair value recognized in the earn out share portionconsolidated statement of the contingent consideration by approximately $1.5 millionloss and would change the additional share portioncomprehensive loss within finance costs. The fair value of the contingent consideration by approximately $1.9 million.
There were no transfers between levels 1, 2 and 3 inputs during the period.
F-39F-45
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
the investment was estimated by using a discounted cash flow analysis. The main assumption used in the calculation was the determination of a credit-adjusted discount rate.
Derivative warrants are designated as FVTPL. The fair value of derivative warrants is re-measured each reporting period with changes in fair value recognized in the consolidated statement of loss and comprehensive loss within finance costs. The fair value of derivative warrants is estimated by using a valuation model. Assumptions used in these calculations include volatility, discount rate and various probability factors.
At December 31, 2021, a 10% change in the material assumptions would change the estimated fair value of derivative warrant liabilities by approximately $4.0 million.
There were no transfers between Levels 1, 2 and 3 inputs during the period.
The Company is exposed to interest rate risk in that changes in market interest rates will cause fluctuations in the fair value of future cash flows. The Company is exposed to interest rate risk through its Syndicated Credit Agreement which has a variable interest rate. The Company was exposed to interest rate risk through its Credit Facilities which had a variable interest rate and were repaid in full during 2019. For the year ended December 31, 2019, a 1% increase in the prime interest rate would result in additional interest expense of $0.6 million (2018 - $47 thousand).
| Credit risk management |
Credit risk is the risk of financial loss if the counterparty to a financial transaction fails to meet its obligations. The Company manages risk over its accounts receivable by issuing credit only to credit worthy counterparties. The Company limits its exposure to credit risk over its investments by ensuring the agreements governing the investments are secured in the event of counterparty default. The Company considers financial instruments to have low credit risk when its credit risk rating is equivalent to investment grade. The Company assumes that the credit risk on a financial asset has increased significantly if it is outstanding past the contractual payment terms. The Company considers a financial asset to be in default when the debtor is unlikely to pay its credit obligations to the Company.
The Company applies the simplified approach under IFRS 9 to accounts receivable and has calculated ECLs based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions.
Impairment losses on accounts receivable recognized in profit or loss were as follows:
| ||||
|
| |||
|
| |||
|
As at | December 31, 2021 |
| December 31, 2020 |
| ||
Impairment loss (reversal) on trade receivables |
| 214 |
|
| (506 | ) |
Impairment loss (reversal) on other receivables |
| 798 |
|
| (126 | ) |
|
| 1,012 |
|
| (632 | ) |
The movement in the allowance for impairment in respect of accounts receivable during the year ended December 31, 2021 was as follows:
December 31, 2021 December 31, 2020 Balance, beginning of year 120 752 Net remeasurement of impairment loss allowance 1,012 (632 ) Balance, end of year 1,132 120 The Company applies the general approach under IFRS 9 to investments, which is an assessment of whether the credit risk of a financial instrument has increased significantly since initial recognition. The general approach compares the risk of a default occurring at the reporting date with the risk of a default occurring at the date of initial recognition. The Company has evaluated the credit risk of its investments, taking into consideration the risk of default, historical credit loss experience, financial factors specific to the debtors and general economic conditions and determined the expected credit loss to be nil. |
| |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
|
|
The maximum amount of the Company’s credit risk exposure is the carrying amounts of cash and cash equivalents, accounts receivable and accounts receivable.investments. The Company attempts to mitigate such exposure to its cash by investing only in financial institutions with investment grade credit ratings.ratings or secured investments.
During 2019, four customers of the Company accounted for more than 10% each of total revenue.
|
|
The Company is exposed to risks arising from fluctuations in currency exchange rates between the Canadian dollar, Pound Sterling and United States dollar. At December 31, 2019, the Company’s primary currency exposure related to the Pound Sterling (“GBP”) and United States dollar (“USD”) balances. The following table summarizes the Company’s foreign currency exchange risk for each of the currencies indicated:
As at December 31, 2019 | GBP |
| USD |
| ||
Cash and cash equivalents |
| 1,418 |
|
| 22,088 |
|
Accounts receivable |
| 3,071 |
|
| — |
|
Accounts payable and accrued liabilities |
| (6,254 | ) |
| (2,150 | ) |
Net foreign exchange exposure |
| (1,765 | ) |
| 19,938 |
|
Translation to CAD |
| 1.7174 |
|
| 1.2988 |
|
CAD equivalent at period end exchange rate |
| (3,031 | ) |
| 25,895 |
|
|
|
|
|
|
|
|
As at December 31, 2018 | GBP |
| USD |
| ||
Cash and cash equivalents |
| — |
|
| 3,148 |
|
Accounts receivable |
| — |
|
| — |
|
Accounts payable and accrued liabilities |
| — |
|
| — |
|
Net foreign exchange exposure |
| — |
|
| 3,148 |
|
Translation to CAD |
| 1.7439 |
|
| 1.3642 |
|
CAD equivalent at period end exchange rate |
| — |
|
| 4,295 |
|
F-40F-46
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
c) | Market risk management |
BasedMarket risk is the risk that changes in market prices will affect the Company’s income or value of its holdings of financial instruments. The Company is exposed to market risk in that changes in market prices will cause fluctuations in the fair value of its marketable securities. The fair value of marketable securities is based on quoted market prices as the net foreign exchange exposure atCompany’s marketable securities are shares held of publicly traded entities and put and call options.
At December 31, 2021, a 10% change in the endmarket prices would change the fair value of the year, if these currencies had strengthened or weakened by 10% compared to the Canadian dollar and all other variables were held constant, the after-tax earnings would have decreased or increasedmarketable securities by approximately $8.4 million.
The Company had the following amounts:risk management contracts relating to marketable securities outstanding as at December 31, 2021:
| Year ended December 31 |
| Ten months ended December 31 |
| ||
Pound sterling (GBP) |
| (303 | ) |
| — |
|
United States dollar (USD) |
| 2,590 |
|
| 429 |
|
Impact on profit (loss) |
| 2,287 |
|
| 429 |
|
As at December 31, 2021 | Quantity |
| Expiry | Proceeds |
| Fair value |
| |||
Sold put options |
| 2,174 |
| Feb 18, 2022 |
| 34 |
|
| 27 |
|
Sold put options |
| 1,329 |
| Mar 18, 2022 |
| 65 |
|
| 51 |
|
|
| 3,503 |
|
|
| 99 |
|
| 78 |
|
|
| Liquidity risk management |
Liquidity risk is the risk that the Company cannot meet its financial obligations when due. The Company manages liquidity risk by monitoring operating and growth requirements. Management believes its current capital resources and its ability to manage cash flow and working capital levels will requirebe sufficient to satisfy cash requirements associated with funding the CompanyCompany’s operating expenses to seekmaintain capacity and fund future additional financing to allow it to meet its obligations, to make debt service requirements, and to funddevelopment activities for at least the other needs of its business.next 12 months. However, no assurance can be given that this will be the case or that future sources of capital will not be available. The ability of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable operations. Any delay or failure to complete any additional financing would have a significant negative impact on the Company’s business, results of operations and financial condition, and the Company may be forced to reduce or cease its operations or seek relief under applicable bankruptcy laws.necessary.
The timing of expected cash outflows relating to financial liabilities at December 31, 20192021 is as follows:
| Less than one year |
| One to three years |
| Three to five years |
| Thereafter |
| Total |
| Less than one year |
| One to three years |
| Three to five years |
| Thereafter |
| Total |
| ||||||||||
Accounts payable and accrued liabilities |
| 58,110 |
| — |
| — |
| — |
| 58,110 |
|
| 38,452 |
| 0 |
| 0 |
| 0 |
| 38,452 |
| ||||||||
Syndicated Credit Agreement (1) |
| 84,000 |
| — |
| — |
| — |
| 84,000 |
| |||||||||||||||||||
Term Debt Facility (1) |
| 115,000 |
| — |
| — |
| — |
| 115,000 |
| |||||||||||||||||||
Deferred consideration |
| 32,501 |
| — |
| — |
| — |
| 32,501 |
| |||||||||||||||||||
Lease obligations |
| 722 |
| 1,902 |
| 683 |
| 13,642 |
| 16,949 |
|
| 5,938 |
| 10,514 |
| 8,424 |
| 13,629 |
| 38,505 |
| ||||||||
Financial guarantee liability |
| 0 |
| 466 |
| 0 |
| 0 |
| 466 |
| |||||||||||||||||||
Balance, end of period |
| 290,333 |
| 1,902 |
| 683 |
| 13,642 |
| 306,560 |
|
| 44,390 |
| 10,980 |
| 8,424 |
| 13,629 |
| 77,423 |
|
33. |
|
|
|
|
|
At December 31, 2020, the Company had advanced $139 thousand under employee loan agreements. The terms were non-interest bearing and secured by shareholdings in the Company. During the year ended December 31, 2021, the full $139 thousand loan balance was settled. At December 31, 2021, the outstanding loan balance was nil. |
|
|
| Related party transactions and balances |
| Transactions |
| Balance outstanding |
| ||||||||
| Year ended December 31 |
| Year ended December 31 |
| December 31 |
| December 31 |
| ||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Marketing, brand research and development (a) |
| 0 |
|
| 1,144 |
|
| 0 |
|
| 0 |
|
Legal services (b) |
| 0 |
|
| 2,462 |
|
| 0 |
|
| (510 | ) |
|
| 0 |
|
| 3,606 |
|
| 0 |
|
| (510 | ) |
(a) | A former member of the Board controlled a company that provides marketing, brand research and development services. |
(b) | A member of the Board was a partner at a law firm prior to his departure which provides legal services to the Company. |
The Company has outstanding amounts receivable from and payable to related parties, including employees, directors and corporations related to those individuals. As at December 31, 2019, the Company was owed $0.2 million (December 31, 2018 - $0.5 million) from related parties and owed $1.0 million (December 31, 2018 - $0.8 million) to related parties.
The amounts owing from related parties are both interest bearing and non-interest bearing and have various repayment terms.
Loan Receivable Agreements
On April 6, 2018, the Company issued 40,000 common shares to an officer of the Company at a fair value of $2.97, in accordance with an employment agreement. On April 6, 2018, the Company and this officer also entered into a shareholder loan agreement that provides a loan facility of up to $510 thousand to the officer. The loan bore interest at a rate of 2.5% per annum, had a term of three years, and was secured against the officer’s shareholdings in the Company. The loan was repayable in full upon the officer’s departure, a change of control of the Company or sale of the Company. As at December 31, 2018, $245 thousand had been advanced under this shareholder loan agreement. In July 2019, the loan was extinguished against performance bonuses declared in the form of salary compensation such that no amount remains outstanding under the shareholder loan agreement.
The Company has entered into separate shareholder loan agreements with two (December 31, 2018 – three) employees of the Company. The loans bear interest at rates ranging from 0-1.5% per annum and are secured by the employees’ shareholdings in the Company. The loans are each repayable in full upon an employees’ departure from
F-41F-47
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
employment, a change of control of the Company or sale of the Company. As at December 31, 2019, $200 thousand (December 31, 2018 - $190 thousand), had been advanced under these loan agreements.
On February 15, 2018, the Company and an officer entered into a shareholder loan agreement that provides for a loan of up to $200 thousand per year. The loan bore interest at a rate of 2.5% per annum and was secured by the officer’s shareholdings in the Company. The loan was repayable in full upon the officer’s departure, a change of control of the Company or sale of the Company. During 2019, $400 thousand was advanced under this loan agreement. In July 2019, the loan was extinguished against performance bonuses declared in the form of salary compensation such that no amount remains outstanding under the shareholder loan agreement.
Promissory note
During the ten months ended December 31, 2018, the Company entered into an agreement with a former officer of the Company to repurchase a total of 9,815,701 common shares at a weighted average price of $1.69 per common share for total consideration of $16.6 million. A balance of $6.9 million remained unpaid under the agreement and was converted to an Unsecured Subordinated Promissory Note (the “Promissory Note”) as described under note 13(g). The Promissory Note matured on March 25, 2019 but was extended in accordance with the terms of the Note. The balance of $6.9 million outstanding included principal and interest which accrued from the date of extension at a rate of 1% per month and was repaid in full on June 5, 2019.
Transactions
Marketing, brand research and development and promotional costs totalling $3.1 million for the year ended December 31, 2019, (ten months ended December 31, 2018 - $2.3 million, year ended February 28, 2018 - $1.0 million) were paid to a company controlled by a shareholder, officer and director of the Company. At December 31, 2019, the Company owed a balance of $0.3 million (December 31, 2018 - $0.3 million) relating to services under this contract.
Land lease costs related to our Bridge Farm operations, at an annual amount of £600,000, were paid to a family member of a former executive officer.
Consulting services were provided to the Company by an officer, including services related to private placements completed. For the year ended December 31, 2019, consulting and commission expenses totalled nil (ten months ended December 31, 2018 - $1.5 thousand, year ended February 28, 2018 - $399.3 thousand).
The Company has two contracts with companies in which an officer (who is not considered a member of key management) of the Company maintains influence. The contracts relate to research and development services being provided to the Company and its ability to access and license certain strains of cannabis for research purposes. For the year ended December 31, 2019, the fees paid totaled $334.5 thousand (ten months ended December 31, 2018 - $229.4 thousand, year ended February 28, 2018 - $97.6 thousand). At December 31, 2019, the Company owed a balance of $60 thousand (December 31, 2018 - $19 thousand) relating to services under these contracts.
A member of the Board of Directors is a partner at a law firm which provides legal services to the Company. For the year ended December 31, 2019, professional fees totalling $3.9 million (ten months ended December 31, 2018 - $0.6 million, year ended February 28, 2018 - $0.2 million) were incurred for services provided by this firm. At December 31, 2019, the Company owed $0.4 million (December 31, 2018 - $0.3 million) relating to various corporate matters and financings.
During the year ended December 31, 2019, the Company entered into an agreement with an employee to acquire certain equipment for $0.9 million.
During the ten months ended December 31, 2018, the Company forgave $5 thousand in debt owed by a former officer of the Company.
During the ten months ended December 31, 2018, a now former officer of Sundial was paid $7 thousand with respect to accommodations for staff housing (year ended February 28, 2018 - $6 thousand). Included in the asset impairment for the year ended February 28, 2018, was $75 thousand related to farm and shop equipment that was previously purchased from the same officer.
During the ten months ended December 31, 2018, a now former member of the Board of Directors provided consulting services to the Company for which she was paid nil (year ended February 28, 2018 - $29.6 thousand). In addition, director fees of nil and $60.0 thousand were paid during the respective periods. The Company also forgave $20.0 thousand in debt owed by this former member of the Board of Directors. This director resigned from the Board effective January 15, 2018.
All transactions were conducted at the exchange amount agreed to betweenwith the related parties.
F-42
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2019
(Expressed in thousands of Canadian dollars, except where otherwise noted)
The Company considers directors and officers of the Company as key management personnel.
| Year ended December 31 |
| Ten months ended December 31 |
| Year ended February 28 |
| Year ended December 31 |
| ||||||||||
| 2019 |
| 2018 |
| 2018 |
| 2021 |
| 2020 |
| 2019 |
| ||||||
Salaries and short-term benefits |
| 3,295 |
|
| 1,237 |
| 320 |
|
| 2,348 |
|
| 1,944 |
| 3,295 |
| ||
Share-based compensation |
| 23,715 |
|
| 2,414 |
| 4,173 |
|
| 8,275 |
|
| 7,629 |
| 23,715 |
| ||
|
| 27,010 |
|
| 3,651 |
| 4,493 |
|
| 10,623 |
|
| 9,573 |
| 27,010 |
|
As at December 31, 2019, $nil (December 31, 2018 - $367 thousand) was owed to the Company from key management personnel.
| Capital management |
The Company defines its capital as its shareholder’sshareholders’ equity and debt. Except as otherwise disclosed in these consolidated financial statements, there are no restrictions on the Company’s capital. The Company’s objectives with respect to the management of capital are to:
Maintain financial flexibility in order to preserve its ability to meet financial obligations;
Deploy capital to provide an appropriate investment return to its shareholders; and,
Maintain a capital structure that allows various financing alternatives to the Company as required.
The Company is an early-stage company and has accumulated significant losses. Furthermore, the Company and certain of its subsidiaries have a limited operating history and a history of negative cash flow from operating activities. During the year ended December 31, 2019, the Company sourced the capital and liquidity to advance its strategic growth initiatives by way of the following capital transactions:
Completed an initial public offering of 11 million common shares for gross proceeds of $189.5 million (note 19b);
Entered a $115 million Term Debt Facility (note 13c) to fund the acquisition of Bridge Farm (note 5a), repay Bridge Farm debt and fund capital expenditures in the UK;
Issued $93.2 million of Senior Convertible Notes which were converted into common shares following the initial public offering (note 14);
• | Maintain financial flexibility in order to preserve the ability to meet financial obligations; |
Entered into a new $90 million Syndicated Credit Agreement whereby a portion of the proceeds were used to repay all amounts outstanding under the Credit Facilities (note 13).
• | Maintain a capital structure that allows various financing alternatives. |
As disclosed in note 1, the Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital, continued support from its lenders, its ability to successfully obtain or maintain licenses to produce and sell cannabis, its ability to achieve sustainable revenues and profitable operations and, in the meantime, its ability to obtain the necessary financing to meet its obligations and repay its liabilities when they become due.
| Commitments and contingencies |
| (a) | Commitments |
The Company has entered into certain supply agreements to provide dried cannabis and cannabis products to third parties. The contracts require the provision of various amounts of dried cannabis on or before certain dates. Should the Company not deliver the product in the agreed timeframe, financial penalties apply which may be paid either in product in-kind or cash. Under these agreements, the Company has accrued financial penalties payable as at December 31, 20192021 of $1.5$2.5 million (December 31, 20182020 - $3.3$1.5 million).
(b) | Contingencies |
CommitmentsFrom time to time, the Company may become involved in legal proceedings arising in the ordinary course of our business. Such proceedings, certain of which have been threatened against us, could include commercial litigation related to breach of contract claims brought by our customers, suppliers and contractors, as well as litigation related to termination of certain of our employees. The outcome of any litigation is inherently uncertain. Although we believe we have meritorious defenses against all currently pending and threatened proceedings and intend to vigorously defend all claims if they are brought, unfavorable rulings, judgements or settlement terms could have a material adverse impact on our business and results of operations.
In connection with our initial public offering (“IPO”), we and certain of our current and former officers and directors, as well as the license agreement with Pathwayunderwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and Sun 8 have been disclosedNovember 1, 2019. The cases were consolidated in note 5(c) and note 11 respectively.
Under employment agreements with certain management personnel,two separate actions depending on the Company has commitments to those management personnelcourt in which they were first filed, one in the eventSupreme Court of terminationNew York, New York County, captioned In re Sundial Growers Inc. Securities Litigation, Index No. 655178/2019 (the “New York IPO Action”), and the other in the United States District Court for the Southern District of employment.New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC (the “Federal IPO Action”). The complaints in each of the two consolidated actions assert claims under Sections 11, 12(a)(2), and 15 of the U.S. Securities Act of 1933, as amended (the “Securities Act”). They generally allege that we made material misstatements and omissions in the prospectus and registration statement in connection with the IPO with respect to, among other things, the failure to disclose systemic
F-43F-48
Sundial Growers Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 20192021
(Expressed in thousands of Canadian dollars, except where otherwise noted)
From timequality control issues as well as the return of cannabis and termination of the supply agreement by one of the Company’s customers. The complaint in the Federal IPO Action also includes allegations that we made misstatements as to time,revenue. The New York IPO Action was dismissed on May 15, 2020 and the dismissal was affirmed on February 16, 2021, by the Appellate Division, First Judicial Department, of the Supreme Court of New York.
In the Federal IPO Action, the court denied defendants’ motion to dismiss on March 30, 2021. On August 27, 2021, following a mediation, the parties notified the court that they had reached an agreement in principle to settle the Federal IPO Action. On December 2, 2021, the parties executed a settlement agreement, which was submitted to the court for approval on December 3, 2021 and remains subject to such court approval.
In connection with the settlement agreement, the Company has an unrecognized contingent asset of $2 million, representing the difference between the settlement amount and the deductible under the Company’s directors and officers insurance policy. A contingent asset is involveddisclosed when an inflow of economic resources is probable. A receivable for the $2 million will not be recognized until written confirmation of payment is received from the insurers.
In addition, on May 7, 2020, the Company and certain of its current and former directors and officers were named as defendants in various claims and legal actions which occurreda lawsuit, captioned SUN, a Series of E Squared Investment Fund, LLC et al. v. Sundial Growers Inc. et al., Case No. 1:20-cv-03579-ALC, in the ordinary courseUnited States District Court for the Southern District of New York. The complaint asserts claims for alleged violations of U.S. federal securities laws, including Sections 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) the Securities Exchange Act of 1934, as well as claims for breach of contract, fraud in the inducement and negligent misrepresentation. Among other things, the complaint alleges that the company made misrepresentations regarding the licensing and ability of Bridge Farm to export hemp and CBD to Europe, as well as regarding the quality of the Company’s cannabis. On September 30, 2021, the court granted defendants’ motion to dismiss and dismissed the case, dismissing the claims under the U.S. federal securities laws with prejudice and the remaining claims without prejudice.
The Company can provide no assurance as to the outcome of these proceedings or any other litigation matter in which we are a party. In particular, securities class action lawsuits are typically costly to defend, and divert the attention of management and other resources from operations and, accordingly, even if resolved in our favor, could have a material adverse effect on our business, financial condition, results of operations and liquidity and may force us to reduce or cease operations or seek relief under the losses from which, if any, are not anticipated to be material to the financial statements.applicable bankruptcy or insolvency laws.
| Subsequent events |
Alcanna Inc. Acquisition
On October 7, 2021, the Company announced that it had entered into an arrangement agreement with Alcanna Inc. (“Alcanna”) pursuant to which the Company will acquire all of the issued and outstanding common shares of Alcanna by way of a statutory plan of arrangement (the “Alcanna Transaction”). The global impactCompany and Alcanna amended the arrangement agreement in respect of Covid-19 has resultedthe Alcanna Transaction on January 6, 2022, and the Alcanna Transaction closed on March 31, 2022. Alcanna is a Canadian liquor retailer, operating predominantly in significant declinesAlberta under its three retail brands, “Wine and Beyond”, “Liquor Depot” and “Ace Liquor”. Alcanna holds an approximately 63% equity interest in global stock marketsNova Cannabis Inc. (“Nova”), a Canadian cannabis retailer operating stores across Alberta, Saskatchewan and has contributed toOntario.
The Alcanna Transaction consideration was comprised of (i) an aggregate $54.3 million cash ($1.50 in cash for each Alcanna common share), and (ii) an aggregate 320.6 million Sundial common shares valued at $280.4 million based on the fair value of each common share of the Company on the closing date (8.85 of a great deal of uncertainty asSundial common share for each Alcanna common share).
Due to the healthproximity of the global economy overclosing of the next 12 to 18 months. TheAlcanna Transaction and the date of issuance of the consolidated financial statements, the Company has at least one employee at Bridge Farm who has tested positivenot prepared the acquisition date fair value of the total consideration transferred or the amounts recognized as of the acquisition date for the COVID-19 viruseach major class of assets acquired and is being attended to by health professionals. Although we do not expect to close the Bridge Farm facilities, we have taken additional precautions and plan to reduce operations at Bridge Farm starting April 1, 2020. There can be no guarantee that we will not have to suspend operations at Bridge Farm for a significant period of timeliabilities assumed.
The impact of COVID-19 is likely to have a negative impact on the Company’s ability to raise financing in the near future or on terms favourableF-49
Sundial Growers Inc.
Notes to the Company (see Note 1). The potential impact that Covid-19 will have onConsolidated Financial Statements
For the Company’s business or financial results cannot be reasonably estimated at this time. However, any shutdowns requested or mandated by government authoritiesyear ended December 31, 2021
(Expressed in response to the outbreakthousands of COVID-19 that may affect the Company, its suppliers, distribution channels or customers may have a material impact to the Company’s planned operations.Canadian dollars, except where otherwise noted)
F-44
Nasdaq minimum bid requirement
As previously reported, the Company was notified by Nasdaq on August 9, 2021, that the bid price for its common shares did not meet the minimum bid price of US$1.00 per share requirement, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Requirement”). At that time, the Company was required to regain compliance by February 7, 2022. On February 8, 2022, the Company received a 180-day extension to regain compliance with the Minimum Bid Requirement. As a result, the Company has until August 8, 2022, to regain compliance with the Minimum Bid Requirement.
If at any time prior to August 8, 2022, the closing bid price of the Company’s common stock is at least US$1.00 per share for a minimum of ten consecutive business days, the Company will be considered by Nasdaq to have regained compliance with the Minimum Bid Requirement.
The Company will actively monitor its closing bid price during the compliance period and intends to take appropriate measures to remedy the deficiency and regain compliance with the Minimum Bid Requirement.
Sun 8 Holdings Inc.
In 2019, the Company purchased intellectual property from Sun 8 Holdings Inc. (“Sun 8”) consisting of cannabis brands and products. The agreement included future consideration in the form of warrants to acquire up to 1.8 million common shares at an exercise price of $0.94, contingent upon achieving minimum thresholds of revenue derived from the acquired brands and cultivars over five years. The agreement also included royalty payments based on defined harvest metrics and merchandise sold under the acquired brands.
Subsequent to December 31, 2021, the Company and Sun 8 mutually terminated the service and sale agreement entered into in 2019. The Company issued 3.7 million common shares with a value of $2.9 million and made a cash payment of $3.1 million to cancel the royalty agreement and the non-competition agreement, as well as acknowledge vesting of 0.6 million performance warrants. The remaining 1.2 million warrants will not vest, and the Company is relieved of any future obligation pertaining to the warrants.
Investments
Subsequent to December 31, 2021, the Company entered into a promissory note with a private company with a principal amount of $5.0 million, an interest rate of 15% per annum and a maturity date of February 9, 2025.
Subsequent to December 31, 2021, the Company and Delta 9 Cannabis Inc. (“Delta 9”) entered into a note purchase agreement with an aggregate principal amount of $10.0 million, an interest rate of 10% per annum and a maturity date of March 30, 2025.
F-50